The NSW Treasurer, Dominic Perrottet, delivered the delayed 2020-21 NSW State Budget on 17 November 2020. The Budget represents a major diversion from previous fiscal strategy in order to assist the state economy to recover from the Covid-19 pandemic and its economic impact.

Budget position

NSW recorded a budget deficit for 2019-20 of $6.9 billion, with a projected deficit of $16 billion in 2020-21.

Net debt is projected to projected to lift from negative $8.8 billion in June 2019 to $104 billion by June 2024 as NSW continues and expands its substantial infrastructure investment program and other stimulus and response measures within a constrained environment for taxation revenue.

Budget Strategy

The Budget is intended to accelerate the recovery of activity and employment in NSW in a way that is complementary to the federal government and Reserve Bank stimulus measures.  In addition, the government continues its program of public sector reform and takes a further step along the path of fundamental tax reform.  

The cornerstone of the strategy is the large increase in infrastructure investment across transport and a range of social infrastructure areas including social housing, education and health.  This is supported by a number of measures that will boost business cash flow and remove barriers to employment.  The largest of these is the reduction in the rate of payroll tax for 2020-21 and the following year. 

A number of important labour market measures were announced including programs to support school leavers into employment, to assist women re-entering the workforce and measures to support apprentices and trainees. These will help address gaps in the coverage of the federal government’s JobKeeper program.

Expectations for the NSW Economy

Following a contraction of 1% in 2019-20, economic activity is expected to fall by a further ¾% in 2020-21. Growth is then expected to rebound to 2½% in 2021-22, and continue to grow at an above-trend rate throughout the four year estimate period, based on unprecedented levels of stimulus and successful management of the pandemic.

Unemployment is likely to rise in coming months, as key Commonwealth support measures such as JobKeeper unwind, and is not expected to return to pre-COVID-19 levels over the four years of the budget forecast horizon. But stimulus measures are expected to hasten a recovery that will see a decline in the unemployment rate to 5¼ per cent by June quarter 2024.

The Government expects wage costs in the state to moderate from 1.8% in June 2020 to between 1¼ % and 1½ % pa over the next three years. Its own wage costs have been limited to 1.5% pa growth.

The closure of international borders has lowered the state’s population growth to the slowest rate in more than 100 years. This will weigh heavily on short-term economic growth and severely impact the state’s education and tourism exports.

Chart: Economic activity and employment take time to rebound from pre-COVID-19 low

Chart 1 COVID Rebound

Key Risks to the Outlook

Expedited development and distribution of a vaccine could lead to a faster recovery in trade-exposed sectors such as education and tourism and a quicker than expected removal of remaining social distancing restrictions. This would see higher consumer spending and lower unemployment than expected. Conversely, an effective vaccine may never eventuate, or could be delayed, impacting service export industries for far longer than currently envisaged.

On the downside, re-opening the economy could contribute to a spike in infections, which would either heavily impact people’s willingness to leave home, or trigger a re-tightening of containment measures. Either of these outcomes would have a substantial negative impact on the economy and the labour market. The longer containment measures persist, the more enduring the impact on incomes and structural rates of unemployment.

There also is a high level of uncertainty about what will happen once temporary fiscal support, including JobKeeper, are scaled back from the December quarter (with JobKeeper slated to end after March 2021). Recently announced stimulus measures are helping to mitigate this risk. The most important of these is the federal government’s bring-forward of personal income tax cuts backdated to 1 July this year. Cash flow enhancing measures, debt repayment holidays and insolvency relief have masked much of the risk of business failure and mortgage default that overshadows the economy, with current levels of insolvencies only around half their usual level. Available data suggests that $179 billion in loans nationally (6.7 per cent of loans), including $133 billion in mortgages, have received a repayment deferral. These policies are buying time for the economy to recover, allowing households and businesses that otherwise would have remained viable (if not for COVID-19) to repair their balance sheets.

Geopolitical tensions with China materialising in the form of substantial restrictions on NSW exports is another tail risk. China already has placed a travel warning on Australia. If this travel warning is still in place after the international borders open to Chinese students and tourists, there will likely be a noticeable impact on services exports and population growth. There have also been reports that China will or has imposed restrictions on the import of certain Australian goods such as coal, timber, copper ore and concentrates, barley, sugar, lobster and wine. Any further escalation in such restrictions could have a material impact on NSW exports.

Migration to Australia could be permanently higher or lower than expected. This could be demand driven (demand from migrants coming to Australia) or policy driven (changes in Commonwealth Government immigration policy). Population growth has been an important driver of the construction industry and consumer demand over the last few decades. A protracted downturn in construction activity is already expected given the dramatic decline in migration. A further decline in population growth would extend this downturn, while an earlier or larger increase in population growth would support a sooner than expected recovery in construction activity.

On the upside, there are a number of encouraging developments including the recent comments from the RBA Governor suggesting a stronger-than-expected recovery, positive indications about the development of vaccines and the recent payroll data pointing to a solid recovery in jobs growth.

The business measures of the budget include:

Taxation and Finance

• a temporary two-year reduction in the payroll tax rate from 5.45 per cent to 4.85 per cent, from 1 July 2020 to 30 June 2022, and a permanent increase in the payroll tax-free threshold to $1.2 million

• small and medium-sized businesses which do not pay payroll tax will have access to a $1,500 digital voucher, to be used towards the cost of any government fees and charges before 30 June 2022, and available from April 2021

• additional support for small businesses, including $39.3 million to extend the Business Connect program and funding for the Office of the Small Business Commissioner to support businesses to tender for New South Wales Government procurement contracts. The Government is also committed to removing barriers to running a business in New South Wales by exploring which temporary relaxations in regulation due to COVID-19 should remain.

• up to $500.0 million in the Out and About program to stimulate spending in the local economy. Every adult resident will be eligible to claim up to $100 in digital vouchers to spend on restaurants, visitor sites and cultural attractions.

•$250.0 million for the Jobs Plus Program, which will drive job creation by supporting businesses and industries seeking to scale up and grow in New South Wales. This includes initiatives such as payroll tax relief and access to free or subsidised spaces, and will be available for companies if they create at least net 30 new jobs

• $179.8 million to support the implementation of the Global NSW Strategy. This investment will grow the Trade and Investment network offshore to support New South Wales businesses in key international markets as well as attracting investment from around the world to support business growth and jobs.

Further investment is also provided to support existing local industries, including:

• $300.0 million to the Regional Growth Fund 2.0 to deliver an extra round of economic development and job creation programs such as the Stronger Country Communities program

• $100.0 million in grants to the Regional Job Creation Fund to incentivise businesses in regional New South Wales to invest, expand their operations, get new customers through the door and create new jobs

•The Government is providing land tax relief for landlords who reduce the rents of tenants experiencing financial distress as a result of the pandemic. Landlords can receive land tax relief (in the 2020 land tax year) of up to 50 per cent of their land tax liability relating to the land leased. This Budget extends this support to provide land tax relief of up to 25 per cent for the 2021 land tax year for landlords of retail tenants. To qualify, landlords must reduce the rents of commercial tenants who have faced at least a 30 per cent reduction in turnover. In 2020, commercial tenants must have an annual turnover of not more than $50.0 million, in order for the rental reductions to be eligible. In 2021, the relief will be limited to rental reductions provided to retail tenants with annual turnover of up to $5.0 million.

Skills

The 2020-21 Budget builds on existing response measures by investing in initiatives to ensure that NSW citizens are equipped to enter or re-enter the workforce. This includes additional investment to create immediate skilling opportunities, and initiatives that ensure the labour market has the right skills to meet the adapting needs of the economy:

• $159 million for the Skilling for Recovery initiative, a key component of the State’s COVID-19 Recovery Plan to help job seekers retrain or upskill, and support school leavers to enter the workforce for the first time. The NSW Government commitment will match the Commonwealth’s JobTrainer funding (total joint investment of $318.6 million) and offer more than 100,000 training places

• $80 million to create 300 new housing sector pre-apprenticeships and cadetships to provide career pathways for young people and social housing tenants

• $57 million for the creation of a Trades Skills Pathways Centre to address skills shortages in the NSW economy by recognising trades skills, establishing new trades pathways and improving skilled employment opportunities for women

• $10 million for grants and Return to Work coordinators to support women who have lost their job due to the COVID-19 pandemic or have been out of the workforce for an extended period to return to work.

Infrastructure and Capital Spending

The Government is increasing its four-year infrastructure program by $9.7 billion to $107.1 billion, including:

•$10.4 billion over the next four years for Sydney Metro West.

• $9.2 billion over the next four years for Sydney Metro – Western Sydney Airport

• $2.2 billion over the next four years for the Sydney Gateway project, providing a new high capacity road connection from Sydney Airport and Port Botany to the new WestConnex St Peters Interchange

• $10.7 billion investment in Health infrastructure over the next four years, including completion of the $673.3 million Tweed Hospital Redevelopment and the $632 million Campbelltown Hospital Stage 2 Redevelopment.

• $7.7 billion invested in Education and Skills infrastructure, with $1.4 billion in new schools infrastructure funding for new and upgraded schools, and $100 million for asset replacement and maintenance for TAFE NSW to deliver quality training services.

• $100 million over two years for the Greater Cities and Regional Sports Facility Fund to deliver sports infrastructure grants of up to $1 million, with a focus on regional NSW.

The Budget also commits to new stimulus across the state for capital maintenance works and smaller shovel-ready projects, including:

• $812 million for new social housing and to undertake significant maintenance and upgrades of social and Aboriginal housing

• $256 million for upgrades and maintenance works across National Parks, the Royal Botanic Gardens, Centennial Park, Sydney Olympic Park and the Crown Land portfolio

• $194 million for wharf upgrades and maritime infrastructure investment across New South Wales, including upgrades and ongoing maintenance

• $167 million for capital works and maintenance of courts, police stations and corrective services, as well as upgrade of the Goulburn Police Academy into a state-of-the-art training facility

• $104 million for an Arts Maintenance and Upgrade Fund to improve accessibility, sustainability and functionality of cultural assets

• $100 million for the Greater Cities and Regional Sports Facility Fund, which aims to create spaces that enable communities to participate in sport at all levels by investing in new and existing facilities.

Longer Term Reform

The Government has used the Budget announcement to make the first concrete moves towards reform of stamp duty in NSW.

They have launched a proposal to give residents the ability to choose between paying stamp duty upfront or paying a much smaller annual property tax, when they next buy a home.

Stamp duty is seen as an impediment to efficiency of the housing market acting as a barrier to people buying their first home or trading up or down to more suitable housing at various stages of their life. It is also a highly variable and cyclic revenue source for the State government.

Unless you are buying a property, there would be no change. Those that have already paid stamp duty on their existing property would not be subject to an annual property tax.

The Government is seeking public comment on the proposal before proceeding further.  Ai Group will consult with members in developing our input on the proposal.

Further details on the Budget

NSW Government Budget website

Ai Group Media Release