Understanding the 2024-25 NSW budget: What it means for businesses
29 June 2024
Last Monday David Williams-Chen presented to a business audience from the SGLBA - Sydney Gay and Lesbian Business Association on a brief overview of the 2024-25 NSW budget that was released earlier this month. Below is a summary of that presentation.
In this briefing we explore three main points:
Why does the NSW government budget matter to businesses?
What is the current state of NSW’s budget?
What is NSW’s economic outlook?
The following insights are derived directly from the budget papers, reflecting the Government and Treasury's perspective of the economic outlook.
Why does the NSW Government budget matter to businesses?
Most obviously Government policy directly impacts businesses through taxes, levies, regulatory requirements, and policy choices that affect workers such as housing, planning, and transport.
Additionally, the government is a significant part of the economy:
Employing 450,000 workers across the state, with 1 in 10 workers in Sydney employed by the Government.
Spending $120 billion annually, equivalent to the GDP of a medium-sized country.
One in six dollars spent in the NSW economy comes from the state government.
Even if the government isn't directly your customer, your customers are likely influenced by government spending, making the health of the state’s budget crucial for your business.
The current state of NSW’s Budget
The NSW government is currently facing a budget deficit, which has worsened since the mid-year update (see Fig. 1)
Key factors contributing to this include:
Changes to GST
Weaker payroll tax
Higher interest costs, which have more than doubled over the decade to 2023 and are projected to double again by 2028
The Minns government has also implemented cost-of-living measures, such as:
A $60 weekly toll road cap
Payroll tax relief for GP clinics that bulk bill at certain levels
A $350 power bill relief for selected households
To counterbalance these costs, the government has taken measures to increase revenue and reduce expenditure. For example, freezing land tax thresholds will net the NSW government $1.5 billion in the coming years, and suspending contributions to the sovereign wealth fund will save additional funds.
Expenditure restraint and long-term trends
Despite some significant announcements, the budget’s main message from the Treasurer has been about expenditure restraint. Historical trends show that government expenditure, which jumped during the pandemic, is projected to grow at a much slower rate of about 2.5% annually over the next four years, down from 5% in pre-COVID years (see Fig. 2).
As a share of gross state product (GSP), government spending peaked during the pandemic at 17% and is expected to return to long-term averages of 12% (see Fig. 3)
Infrastructure spending is peaking
Infrastructure spending is set to peak in 2024-25 with the completion of major projects like the Sydney Metro City and Southwest. However, projects such as the Sydney Metro West and Western Sydney Airport Metro will continue, alongside new initiatives like the $2.1 billion Parramatta Light Rail Stage 2 (see Fig. 4).
Real wage growth for public sector workers
And what of those 450,000 public sector workers? They will see a 10.5% pay increase over three years, which is projected to exceed the Sydney consumer price index over the next four years (see Fig. 5).
NSW’s overall economic outlook
According to NSW Treasury:
Inflation is receding, particularly for discretionary goods and services, which are now back within the Reserve Bank of Australia's target band (Fig. 6).
Essential goods and services are trending in the right direction but have not yet reached desired levels.
Consumer sentiment remains very negative due to unchanged interest rates, more so than during the COVID-19 years (Fig. 7).
Business confidence is neutral, with businesses possibly optimistic about a soft landing.
Treasury’s projections for the NSW economy include:
Real wage growth across the state, with wages increasing by 3-3.5% (Fig. 8)
Slowing population growth (Fig. 9)
Cooling labor market with unemployment rising to more normal levels of 4-4.5%
GSP growth remaining positive at 2-2.25%
Summary
In conclusion:
NSW government expenditure since the pandemic has ratcheted up to above long-term levels (as a share of the economy) and so with the budget in deficit, the Government is trying to reduce expenditure (as a share of the economy) over the next 4 years to pre-covid levels. As a result there were few new, major expenditure announcements.
While the budget is in deficit, the NSW Government is not rushing to a surplus; the Minns government is choosing to shoulder some of the household’s cost of living pain with some relief measures.
NSW business confidence is neutral, however NSW consumer sentiment is generally very low - worse than during the pandemic.
NSW Treasury’s economic outlook is for a soft landing: with inflation receding, NSW workers are expected to return to wage growth above inflation and while unemployment is projected to rise, NSW GSP is expected to continue to grow.
Understanding these dynamics will help businesses navigate the current economic landscape and plan for the future.