Analysing the 2024 NSW Budget

This week, the NSW Treasurer Daniel Mookhey handed down his second budget since Labor took office. At the same time, the NSW government is facing rising inflation and cost of living, increased public sector wage expenditure, and the worst of Australia’s housing crisis. 

 Find out whether the 2024 NSW Budget tackled these key issues – and more – in this podcast with Grattan CEO Aruna Sathanapally and Deputy Program Director Kate Griffiths.

Transcript

Kate Griffiths: There’s been a buzz of budgets around the country in recent weeks, headlined by the federal budget in May. Most state governments have now handed down their budgets too, but these don’t often attract the same attention or scrutiny. This week, the NSW Treasurer Daniel Mookhey, handed down his second budget since Labor took office after the New South Wales state election last year.

I’m Kate Griffiths, Deputy Director of Grattan’s Economic Prosperity and Democracy Program, and I’m joined by Grattan’s CEO, Aruna Sathanapally, a former New South Wales Treasury official who’s been following the action closely. Welcome, Aruna.

Aruna Sathanapally: Thanks, Kate.

Kate Griffiths: Aruna, this time last year, you were behind the scenes prepping the New South Wales budget.

Now you’re on the other side, reflecting on it and critiquing it. Before we dive into your analysis, perhaps you can give listeners a sense of what budget prep actually looks like on the inside.

Aruna Sathanapally: I have to say it feels a bit unusual to be reviewing the document fresh from the outside and not be involved in the many, many drafts that go through the mill before the final polished version. One of my main observations is how short budget time is from the outside, you know, arrives in a flash on one day.

We talk about it for maybe a week and then, you know, not again for another year. But budgets actually have a really long lead time within government and they’re the funnel through which government makes. decisions across a really vast range of competing demands. So, the process usually starts with trying to figure out how much money the government has to spend.

So, what does the economic environment look like? What do things look like in terms of the different taxes? They then have to grapple with all of the non-discretionary choices or not even choices, I guess, all of the non-discretionary expenditure growth. we’ve seen a lot of inflation. Governments faced the same thing where wages are going up or where there’s certain things that are unavoidable.

And then only after that do, they then turn to the things they might want to do. And alongside that, also the things that they might need to stop doing and, and where they need to make savings. So, they have to make some choices and trade off what all the different ministers want. It’s often quite a methodical process of having to go through very long lists of ideas and shortlist and shortlist.

It’s also just a difficult exercise in prioritization. So that’s what it looks like from the inside.

Kate Griffiths: Yeah, wow, what a mix. And you mentioned inflation. That’s been one of the big challenges, one of the big tasks, in fact, for all state and federal treasurers in recent budgets is this question of how to respond to the cost-of-living crisis whilst also avoiding making inflation worse. How do you reckon New South Wales went with this kind of delicate dance?

Aruna Sathanapally: Yeah, delicate is a good way to put it, right? Like governments are in a tricky position, with the expectation, particularly in Australia, that when people are in hardship, the government has a role in responding. But on the flip side, the challenge that what the Reserve Bank is trying to do is to, to really bring down how much we’re spending.

And so, to the extent that government makes, you know, eases the pressure too much, it might actually make the Reserve Bank’s job harder. Actually, the New South Wales budget is a pretty disciplined budget on cost-of-living measures. In one sense, New South Wales benefits from being able to let the Commonwealth do the heavy lifting on cost of living.

So, you know, the budget was brought down this week, the stage three, or the remodelled stage three tax cuts come into effect in only a few weeks. And that is going to hopefully relieve pressure for a lot of low- and middle-income households. The New South Wales budget does emphasize that it’s spending around $8. 7 billion in the next year on cost-of-living relief. But really, this is largely existing measures that have already been accounted for in the budget. So, it’s not new spending that’s likely to add more fuel to the economy. Things like toll relief, fee relief for preschool fees, or other long-standing ways in which the New South Wales government pays to reduce costs on people, like stamp duty concessions.

There’s very little new spending in this budget. There’s some spending on energy bill relief for low-income households, so for about a million, a million households, but really the focus of this budget is on, on housing and on health.

Kate Griffiths: So that’s sounding quite a lot more restrained than recent sort of state budgets in Victoria, WA, Queensland. New South Wales of course has posted a big deficit, so that’s presumably also a factor here. $3. 6 billion dollars in 2024- 25 and deficits every year over the forward estimates. The Treasurer has been pinning this on the latest GST carve up. What do you think of that? Is that a fair assessment?

Aruna Sathanapally: Yeah, it’s, it’s, it’s interesting, right? Because it’s, it’s not a big spending budget as we just said, but it’s also significantly revises the expectation for this year and the coming years the New South Wales government had as, as late as the end of last year, expected to hit a surplus instead it’s going to post a substantial deficit and there’s going to be deficits in the years to come.

The treasurer has said that it’s, it’s the fault of the Commonwealth Grants Commission that it’s the allocation of GST away from New South Wales that’s responsible for this fairly dramatic change in the outlook. He’s said, it’s $12 billion over the four years that the CGC is responsible for.

There’s been a bit of commentary about where the treasurer gets this figure from. The way he’s explained it is it’s the difference between how much New South Wales was getting in the dollar before and how much it’s getting in the dollar now. So, New South Wales. was getting over 90 cents in the dollar. Now it’s getting about 87 cents in the dollar.

 The thing about GST allocation is that it changes every year. we might get a different number again from the Commonwealth Grants Commission next year, and that might change New South Wales’s fortunes in the opposite direction. There’s been a bit of commentary that maybe the Treasurer was given forecasts that were more optimistic as to what New South Wales was going to get and part of the reason that the decision making was so difficult for this budget was that they expected to get more. And then at the last minute really had the rug pulled out underneath them and found themselves with a significant savings task that they weren’t expecting. It’s plausible that part of what’s gone on with this budget is that late information about how much the government has to spend.

Going back to what I said before, a budget’s many months in the making, the government prepares its strategy, it works out where it’s going to make the tough savings decisions, how much money it has to spend on the things that are its priorities. To be, you know, to be told sort of mid-course that you have a lot less money than you thought can be quite disruptive.

There is something to, to that and I think that given how significant GST is to state budgets there’s probably a legitimate grievance in terms of a significant revenue that can swing quite dramatically year on year. But fundamentally, what the CGC is doing when it allocates GST is trying to account for the fact that New South Wales is actually doing quite well on other types of revenue that it raises.

And you can see that in this budget. You can see the upwards revisions on stamp duty and land tax that reflect the healthy state of the New South Wales property market. And you can also see that, in the CGC’s decision making, the role that the increased price of coal has, which increases New South Wales’s ability as a state with coal to raise money from coal royalties.

So there, there is some reasoning behind what the Commonwealth Grants Commission is trying to do. Ultimately, it’s trying to level the playing field between different states that have access to different sources of revenue and different spending burden. But in this case, I think it’s, it’s hit New South Wales fairly late in the game. It’s taken them by surprise. It’s a fairly big swing. And I think that that’s part of what explains why we’re seeing such a dramatic change, change in the budget.

Kate Griffiths: So, do you think the government then has responded with kind of spending restraint as their sort of best short-term measure?

Aruna Sathanapally: Yeah, it’s, it’s a good question. I think in one sense, there is spending restraint in this budget. My guess is that it’s a budget that probably would have brought about a surplus if they hadn’t seen that massive GST revision. So, you know, it’s, it’s not a big spending budget. It’s quite, it’s quite focused on a few priorities, but ultimately given the size of the CGC hit, that’s not enough.

The other thing that’s going on is significant expenditure growth that you know, all governments will be facing because of rising wages. In New South Wales, historically wages account for about 45 percent of the budget. That’s a pretty massive component. And understandably, there’s been an expectation that as the cost of living has gone up, that wages will go up.

We have seen decline in real wages over recent years with the dramatic rise in inflation. The New South Wales government was elected on a platform of doing something about that. So, it’s not surprising that they’ve committed at a minimum to some wage growth. And that’s part of what, what means that the cost base of government is going to go up over time.

Inflation doesn’t just hit households; it hits governments as well.

Kate Griffiths: So, tell me about some of the longer-term challenges for state government finances at New South Wales. We can focus on New South Wales in particular, but you were involved in the intergenerational report a couple of years ago now in New South Wales. And I think it laid out some pretty substantial challenges.

Aruna Sathanapally: You can see that on the basis of current policy settings, so how, how we raise revenue and how we spend money right now, that the sources of revenue that a state like New South Wales has don’t keep pace with how we see expenditure growing over time. And that’s in the absence of any new policies or decisions, that’s just taking into account historical trends and our demographic change.

And you see that most clearly in a portfolio like health. Health comprises an enormous portion of the budget. The state has, I think, revenues of around $ 120 plus billion, but it has health expenditure of over 30 billion. There’s quite a substantial proportion of the budget that goes to our health system.

That makes sense, you know, we’re a wealthy country, we value health. It makes sense that we would want to spend public money on our healthcare system. At the same time, when we look at both the inflation in the health system the change in technology over time, and then the demographic change, the cost of, of that healthcare is going up, our expectations are rising.

But if we look at the growth in our revenue, it’s not nearly keeping pace. So, one of the big long-term challenges is if we value healthcare, which overwhelmingly we do and if we want to keep providing public healthcare, then we’re going to have to think about how we pay for it.

Kate Griffiths: I seem to recall that New South Wales did in their intergenerational report, did some somewhat groundbreaking work on climate change effects too, because it’s been one of these long-term challenges for budgets that’s gets a sort of hand wavy response in general. And certainly, the federal intergenerational report has, has struggled to sort of capture that.

But New South Wales did a bit of work on that, modelling some of the impacts what they could mean for budgets in sort of 20, 30, 40 years’ time.

Aruna Sathanapally: We’re already seeing some of those pressures play out now in terms of the spikiness of disaster funding. So, you’ll, you know, there’s some discussion in the New South Wales budget around disaster recovery. New South Wales faced some fairly dramatic events over 2019 2020 2021 in terms of both bushfires and floods.

Those things are really expensive. They’re not entirely predictable year on year. So, we don’t necessarily know. I mean, if we have another, another major natural disaster, then this budget might be blown out of the water in terms of what the government may need to spend. And that’s because often government ends up as the insurer of last resort when you have major disasters and there is a strong expectation that government will step in and help, what we saw in our forecasts is that the volatility is increasing, and the size of the damage is increasing. And that’s not just because of climate change. It’s also because of the exposure that we have as we get bigger, as we get wealthier, we’ve got more and more property that is likely to be exposed.

So one of the big challenges is how do we make sure that over the coming years, where we’re building in the right way, we’re building in the right places to reduce that exposure because we know that a lot of the change we’re seeing is already locked in and we’re not necessarily going to be able to avoid what we’re going to see over the next 10 to 20 years through measures that we take today.

Kate Griffiths: So, in terms of, you know, building in the right places that might lead us into talking a bit about housing, which was a major centrepiece of this New South Wales budget. You know, what were the big reforms, and do they do enough to help solving that housing crisis?

Aruna Sathanapally: So, the big initiatives announced in this budget are using surplus government land. So the New South Wales government, when it came in, when the new government came into power, did an audit of public land to identify where there was surplus land that could be used to support housing, using that land to build 21,000 new homes as well as a $5 billion investment in 8, 400 social housing homes which is a mix of new homes and then some homes that are not fit for use that are going to be redone, as well as about half a billion dollars for the planning system. There are initiatives in there as well around homelessness services, some money for key worker housing, some initiatives for renters.

There’s also some stuff on the revenue side, which is always good to see with land tax thresholds being fixed at the rate that they’re at in 2024, rather than being indexed over time, which is worth about $1. 5 billion over four years in terms of extra revenue. But the other thing is that the budget sits alongside a big suite of reforms that the New South Wales Government have announced to increase the supply of housing in well located areas, which is called the Transport Oriented Development Program, which uses a set of measures to basically boost supply around major transport hubs, so that we start to see that that uplift of density that you really need in in our big cities to make sure that people can afford to live in places that already have access to the type of infrastructure that they need and provide ready access to jobs. Those are the big reforms. Whether it’ll solve the housing crisis. This is a mess of you know, many decades in the making in which all three levels of government, local, state, and the federal government have, have been responsible for.

So, I don’t think any one government, or any one budget will really be able to solve the problem, but it’s a good shot at it. It’s a good fit to the types of measures that Grattan has recommended for a number of years are the right things for governments to be doing in the housing space. And a lot of that work obviously has resurfaced with the scale of the problems that we’re seeing now.

It makes it easier to build where people want to live. So, the investment in in planning approvals, I think, is a recognition that if they’re going to uplift density, they’ve got to invest in the in the planning department to be able to make that process smooth and efficient.

It gets government into the business of building. And this is quite important because what we’re seeing is that construction is dropping off because of cost pressures, because of the increased cost of borrowing. Construction goes in cycles, government involvement in construction can play a role in smoothing that cycle out.

And so, government can step in where, where private construction drops off without necessarily crowding out the market. The measures also put social housing front and centre. And there has been a drop off in social housing and a significant unmet need for social housing. So it’s actually, I think quite welcome to see a state government step up and put its infrastructure money in social housing, rather than in many of the other sort of shiny projects that sometimes that money has gone to, because we do have a longstanding need and this makes a fair dent into the high priority waiting list or will do when it comes online. There are some things here that might not necessarily be the sort of highest priority use of housing subsidies. So things like key worker housing might not necessarily go to the people who are really most vulnerable, but I think those measures need to be understood as really part of workforce measures for the state workforce in health, the police workforce, because New South Wales is also facing some significant challenges in a tight labour market to get the staff that it needs to perform essential services.

Kate Griffiths: So, a big step forward, if not a leap on the housing front here. Were there any other big new things in this budget?

Aruna Sathanapally: I mean, not necessarily big, but certainly interesting with the measures that the government’s taken in relation to bulk billing. For those familiar with health policy the states don’t generally get into bulk billing. That’s an area of Commonwealth policy because primary care and GPs are, are funded by the federal government.

But it is true that the problems in bulk billing and an insufficiency of available bulk billing doctors is something that has implications for the states because they run the hospital system. And so, to the extent that people aren’t able to access the care that they need from their GP, then they end up in an emergency ward. And sometimes they end up in an emergency ward further down the track than they would have been otherwise. So, it’s a poor outcome on all fronts. It’s a poor health outcome. It’s a poor financial outcome. And we end up, you know, seeing people in, you know, in an acute setting, in an emergency setting when they don’t necessarily need to be there.

So, anything you can do to boost early intervention and make sure that people can see doctors early is a good thing for the health system, but it’s not something typically that the states, get involved in. But there has been a long running issue between the state governments and GPs for some time now around payroll tax and a decision that was made that payroll tax applies to GP clinics and without getting into the details of that decision this has led to the buildup of significant tax debt by GPs and their peak bodies have been quite concerned about this for some time. Each of the different states has, has, you know, reached their own resolution on this, but New South Wales has done something quite interesting.

It’s set aside the historical debt, but it’s said that going forward, GP practices will have to pay the payroll tax unless they bulk bill at a particular rate. So, it’ll be really interesting to see how this works. Good chance that, particularly at the margins, this should boost the incentives on GP practices to bulk bill.

But you know, the proof will be in the pudding, but it’s a really interesting and potentially quite clever step forward on a longstanding tax dispute and using effectively a tax expenditure, which is a, you know, an exemption from a tax to try and spur on a behaviour that we really, we do want to be seeing from a health system perspective.

Kate Griffiths: I imagine that will be one that other state governments will be watching closely as well. Look, we’ll wrap up there for today. Budgets give us all a moment for these important conversations and ultimately provide a window into government priorities. So, thank you for sharing your expertise with us today, Aruna.

Aruna Sathanapally: Thanks, Kate. It’s always fun to talk budgets.

Kate Griffiths: If you would like to learn more about Grattan Institute’s research, all our work is freely available on our website at grattan.edu.au. You can subscribe to our podcast and newsletter on our website or follow us on social media at Grattan Institute. Our budget analysis is freely available thanks to donations from listeners like you.

Please consider making a regular or one-off donation at grattan.edu.au/donate. Thank you for joining me today.

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