• Recessions in global and national economies driving large NSW Budget deficits.

• Private business investment forecast to fall markedly and consumer spending to be very weak.

Summary

The NSW Treasurer, Eric Roozendall, has delivered the 2009/10 State Budget in recessionary conditions in the global and Australian economies. The Global and Economic Financial Crisis (GEFC) will cause a contraction in world economic growth of nearly 2% in 2009, the weakest outcome in 50 years. It will reduce revenue growth from payroll tax and conveyancing duties because of job falls and lower property turnover.

The Budget deficit for 2008/09 is forecast to be large, at $1.4bn, and fall marginally to $0.99bn in 2009/10. The risk for the NSW (and Federal) Budget deficit is to the upside. For the same reason. Revenue growth could be much weaker than the 8.4% forecast for next year. NSW’s AAA credit rating was reaffirmed by S&Ps today, with the outlook lifted to stable from negative.

There was some doubt about this because of the rising level of State debt. Net debt levels, for the total State sector, are forecast to peak at $49.7bn or 12% of GSP in 2012/13. The subsequent decline in debt is predicated on the reasonable assumption that NSW will resume its actual long term GSP growth trend of about 2.75%pa.

NSW’s economy is forecast to contract by ½% in 2009/10, following a weak ¼% outcome for the current year. It is a recessionary level of activity. The unemployment rate, which was 6.4% in May, is forecast to average 7¾% over 2009/10, rising further to average 8½ over 2010/11. Payroll tax revenues will suffer as a result.

The major downside risk to the NSW growth forecasts recognised by the NSW Treasurer is private sector business investment. Private sector business surveys are indicating a significant fall in business investment over 2009/10 which could extend into 2010/11. Higher risk aversion in financial markets could constrain financing for investment spending. That would weaken the employment forecasts and place the revenue and outlays assumptions at risk of adverse movements.

Public sector capital works has been boosted to $17.9bn in 2009/10, split between General Government, $7.6bn and Private Trading Enterprises, $10.3bn. It will help fill the gap left by the expected fall in business investment. Over the four years to 2012/13 infrastructure spending will total $62.9bn, a rise of 46% over the four years to 2008/09. The major areas of spending are: energy businesses and water sector projects, major transport projects, education facilities and hospitals.