Reporting an almost-miraculous turnaround in NSW, new Treasurer Andrew Constance has thrown a harsh spotlight on the future impact of the recent federal budget on the state’s finances.

Constance said the federal budget would cost NSW $2 billion over the next four years, and while the state could bear the impact in the short term, the impact of cuts to health and education spending — particularly, a reversal of the National Health Reform Agreement from 2017-18 — would be unsustainable long term unless there were a complete of overhaul of Commonwealth-state finances.

Over the 36 years to 2050-51, projections in the budget papers show the federal budget will blow out the “fiscal gap” between state revenues and expenditure, which the NSW government has managed to reel in slightly, from 1.5% to 2.9% of gross state product, with abolition of the NHRA alone accounting for 1.3% of the increase.

The above chart compares the previously expected federal health funding with the funding forecast after the recent federal budget and shows the “jaws of death” opening up to swallow the NSW health budget from 2017-18, with the Commonwealth contribution halving from 26% to 13% by 2050-51. In today’s dollars, this would equate to a $16 billion hit to the state’s revenues, which are $67 billion in 2014-15. Cuts to future Gonski education funding also have an impact.

Constance told journalists in this morning’s lockup the government would continue to work with its federal colleagues to meet the long-term funding challenge.

That’s being polite, and the language in the Treasurer’s budget speech is more direct:

“There is no point pretending that the broken agreements of the federal budget won’t hurt the people of NSW … The Commonwealth should suspend its cuts until a review of the federation can be completed.”

On the other hand, the federal government has done Constance a favour this year with a handy pull-forward of some $700 million of funding for the Pacific Highway upgrade, which helped NSW report a $988 million surplus ahead of the election next March. This funding “re-profiling” will leave NSW short next year, tipping the state back into a small $283 million deficit in 2014-15, but who will care then?

Besides, if Premier Mike Baird is re-elected as expected, his government will have a mandate for the sale of 49% of the state’s remaining electricity assets — mainly, transmission and distribution networks or the “poles and wires” — worth an estimated $20 billion, which will solve some problems.

Some, but not all. The electricity sale will rob the state of recurring dividends and notional income taxes extracted from the electricity network businesses to ensure competitive neutrality with private sector rivals. In 2014-15, that income added up to almost $1.2 billion, and over the four-year forward estimates it totals $3.8 billion.

What’s more, much of the electricity sale proceeds will likely be recycled into new infrastructure spending through Restart, the infrastructure fund that is already flush with $6.7 billion, mostly from the successful sale of the state’s ports.

The Treasurer has a $61 billion infrastructure wish list, including long-promised and much-needed big-ticket items like Sydney’s north- and south-west railway lines, the Westconnex and Northconnex freeways, roads around the planned second airport at Badgerys Creek, big light rail projects, and so on. There are plans for roads we’ve never heard about before, like the new M9 in western Sydney (budget officials could not identify an M8).

Beyond transport, the budget is also delivering big new spending on hospitals ($1.3 billion) and a brand-new $500 million for child protection including mobile technology for private-sector case workers. Newcastle gets a thumping $650 million influx of funding from the sale of its port, although much of that has already announced.

With such a wish list, even after part-selling off the poles and wires — and presumably finishing the job down the track — NSW will fight for every dollar of federal funding it can get.

At the same time, with the state’s economy growing at three times the rate of Queensland and Victoria, a buoyant housing market, and net debt halved from a $20 billion forecast by the former Labor government to $8.6 billion in 2014-15, it may have to work at crying poor.

The budget forecasts 3% growth p.a. in GSP from 2013-14 to 2015-16, a gradual decline in unemployment from 5.75% to 5.25% over the same three years, a creep-up inflation from 2.5% to 2.75% and wages growth to rise from 2.5% to 3.5%.

If it weren’t for Canberra, it would be all good news.

Peter Fray

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