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NSW finances face a serious squeeze unless radical action is taken

18 March 2019
Falling property market means NSW government will need to find ways to strengthen finances
A new report by the Sydney Policy Lab at the University of Sydney reveals that any incoming NSW government faces a difficult fiscal situation, potentially threatening funding for public services.

The report also outlines two new options to improve the fiscal situation in NSW: broadening land tax and treating more public expenditure as an investment rather than a cost.

The falling property market in NSW is projected to see a drop in the largest source of state government revenue, stamp duty. Budgeted revenue from stamp duty has been downgraded by $9.5 billion between 2017/18 and 2020/21, fuelling concerns that fiscal tightening is on the horizon.

The NSW Government needs to future-proof its budget for a post-housing boom economy.
Dr Gareth Bryant

In these dampened economic conditions, the incoming NSW Government will need to find new ways to fund their election promises, the report says.

“The NSW Government needs to future-proof its budget for a post-housing boom economy. The recent housing market slowdown has exposed the over-reliance of the state government on revenue from stamp duty,” report co-author Dr Gareth Bryant said.

Released today, the report makes two recommendations to increase revenue and strengthen finances in NSW while working within the constitutional constraints placed on state governments in relation to taxation.

The two options are a broad-based land tax to cover owner-occupiers and budget innovation to extend the treatment of investments to cover public services.

The NSW Government can no longer ignore the wealth stored in owner-occupied land as a stable, fair and efficient source of revenue.
Emeritus Professor Frank Stilwell

Broadening land tax

The value of untaxed residential land in NSW has now reached about $1 trillion.

The report, ‘Squeezing Services? How the NSW Government can overcome its new fiscal constraints’, argues for the broadening of land tax arrangements in NSW to cover owner-occupied homes.

“The NSW Government can no longer ignore the wealth stored in owner-occupied land as a stable, fair and efficient source of revenue,” co-author of the report Emeritus Professor Frank Stilwell said.

“A broad-based land tax with appropriate safeguards would fund reductions in stamp duty for home owners and provide additional funding for schools and hospitals. With so many people locked out of home ownership altogether, removing owner-occupied exemptions would also promote fairness in the tax system.”

Budget innovations

The report also points to reforming state budget processes to extend definitions of ‘investment’ - currently being used to deliver privatised infrastructure - to also include public services.

Current budget processes view public services in terms of cost only, rather than future benefits.

Conversely, spending on infrastructure is considered an investment, not a cost, because it delivers future income from user payments and asset sales.

Budget innovations can unlock fiscal space by accounting for public services as investments that deliver returns back to the government, such as via savings to the real budget costs of social disadvantage.

“To really fix the NSW budget, the government needs to completely overhaul the way it imagines spending on public services,” Dr Bryant said.

“Major infrastructure projects like WestConnex avoid fiscal constraints because they are defined as investment in a private asset, rather than a budget cost.

“Currently, governments see public services such as health and education as a cost, when they should be treated as an investment in the future. With innovative budgeting, the government could invest in nurses and teachers at interest rates currently reserved for toll roads.”

“Behind the scenes, politicians of all parties will tell you that they’re worried about the future of the public finances in NSW. But there’s not been much talk of that in the current state election. How are we going to continue to fund great public services, like schools and hospitals in the future?” Professor Marc Stears, Director of the Sydney Policy Lab said.

“The Sydney Policy Lab is proud to have commissioned this bold and imaginative report that presents innovative new ways of supporting our public services long into the future. We hope whichever party ends up in government will take its findings seriously.”

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