New South Wales must do its part to curb inflation and help the Reserve Bank “slay the inflation dragon”, the state’s new treasurer, Daniel Mookhey, says.
Ahead of Tuesday’s statement on the NSW budget, Mookhey also said the Minns Labor government would place a major investment fund set up by its Coalition predecessors under review and halt further cash injections into it.
Mookhey said tomorrow’s speech would provide further “discoveries” to the $7.1bn “black hole” of unfunded or hard-to-avoid expenses he had inherited. While plugging the gaps where possible, it was also important to rein in spending.
“If we don’t get our spending under control, we run the risk of the [Reserve Bank] continuing to put up interest rates month after month which means our mortgage holders will be effectively making a bigger sacrifice to fight inflation,” he told a media conference in Sydney.
The RBA earlier this month raised its key interest rate for a 12th time in 13 months and warned that “some further tightening of monetary policy may be required” to curb inflation. Unlike the federal government – which is on track to post a surplus in the 2022-23 year – states haven’t faced as much scrutiny about their spending.
NSW accounts for about a third of the Australian economy, with an annual gross state product of about $770bn. The state’s net debt is about $80bn, or about half that of Victoria. Queensland’s finances, though, are healthier because of a special tariff imposed on coal royalties that NSW has ruled out.
Mookhey said the Labor government had gone to the March elections with a promise not to increase royalty rates for the 2023-24 year and “that remains our approach”.
Unlike Queensland, most of NSW’s coal is thermal used in power plants rather than coking coal used in steel mills. Extra royalties would have an impact on consumers’ power prices, he said.
After its election, the government opted to delay this year’s budget until September to examine the previous government’s spending plans.
Much of Tuesday’s speech will focus on the review of the debt retirement fund, created by the NSW Generations Fund Act set in 2018 “to help lower the debt burden for future generations”.
Mookey said the fund had the potential to cost billions of dollars while also creating “smoke and mirrors” that masked the true state of the budget.
The previous government had planned to borrow as much as $25.3bn to deposit into the fund – or about half the $60bn in total debt sales – over the next four years.
“NSW stands to lose billions if the economy faces a shock akin to Covid-19 or the global financial crisis, sending the value of those investments lower,” he said.
Stripping out assumed profits the fund would have paid into state coffers, the annual surplus projected at $311m for the 2024-25 year instead becomes a deficit of $911m, Mookhey said. For the following year, the forecast $824m surplus becomes a $601m deficit.
“It’s not like we can use this money to pay our bills to pay our essential workers a pay rise, to pay for our schools, or pay for our hospitals,” he said.
The government will ask for a “short’” upper house inquiry and will use its findings to “determine final settings” for the fund before the September budget.
Martin Foo, a director at rating agency S&P Global, said borrowing money to invest in the fund did “add market risk to the state’s budget over time”. Projections had put the fund swelling to $90bn by decade’s end.
The fund seems like a good idea when interest rates “looked like they were going to be low forever”, he said.
Mookhey said the cost of borrowing had risen about 10-fold from the Covid-era lows.
The shadow treasurer, Damien Tudehope, said the government was “robbing the future to pay for today”.
“The taxpayers of NSW should be concerned that the savings responsibly invested for the future are going to be raided to pay for Labor’s unfunded election promises,” Tudehope said. “The treasurer needs to rule out any move to abolish the NGF and assure NSW taxpayers that the fund will remain in place for the purpose of debt retirement.”
