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1. OVERVIEW 1.1 Introduction The 2016-17 Budget delivers on the Government’s commitment to deliver quality services and infrastructure throughout the State. This investment continues to increase employment opportunities and drive economic growth. The NSW economy continues to lead the nation, with growth in economic activity well above the rest of Australia over the last year. Above-trend economic growth is expected to continue over the next two years. New South Wales boasts the lowest unemployment rate of any state and has created more than 80 per cent of all the full-time jobs added nationally in the last year. The 2016-17 Budget builds on this success and demonstrates the Government’s commitment to driving strong, sustainable growth that benefits the whole community. The Government continues to deliver strong fiscal results. The 2016-17 Budget projects surpluses averaging $2.0 billion over the next four years. Chart 1.1 sets out changes in the budget result since the 2015-16 Half-Yearly Review. While stronger-than-expected revenue will deliver a substantial surplus for the State in 2015-16, weaker growth in GST payments from the Australian Government and a moderating housing market will place pressure on revenues over the forward estimates. A disciplined approach to controlling expenditure growth, demonstrated over the last five years, will continue to ensure that the Premier’s and State priorities are delivered sustainably and in a way that maintains the State’s triple-A credit rating. Government is sensibly using the State’s balance sheet to support record levels of investment in infrastructure, with the proceeds of asset recycling used to fund a range of infrastructure investments in public transport, roads, hospitals and schools. Chart 1.1: Change in budget result since 2015-16 Half-Yearly Review 4,000 3,500 3,000 $ millions 2,500 2,000 1,500 1,000 500 0 2015-16 2016-17 2015-16 Half-Yearly Review Budget Statement 2016-17 2017-18 2018-19 2016-17 Budget 1-1 Overview 1.2 Fiscal outlook The 2016-17 Budget delivers a strong financial position for the State. The Government’s control over expenditure growth and continued focus on driving efficiency allows for targeted new spending guided by the Premier’s and State priorities. It will also help keep annual spending growth below long-term average revenue growth, a target set out in the Fiscal Responsibility Act 2012. The Government has continued to respond to changing revenue levels, while still investing in key initiatives. The Budget delivers surpluses over the forward estimates, even as revenue pressures emerge in the mid years of the forward estimates. Table 1.1 presents the key budget aggregates for the 2016-17 Budget. Table 1.1: Key budget aggregates 2015-16 Revised Revenue ($m) Revenue grow th (per cent pa) Expenses ($m) Expense grow th (per cent pa) Budget Result ($m) Per cent of GSP 2016-17 Budget 2017-18 2018-19 2019-20 Forw ard Estimates 73,772 77,005 76,948 77,479 80,656 6.0 4.4 (0.1) 0.7 4.1 70,363 73,292 75,622 76,097 79,043 5.4 4.2 3.2 0.6 3.9 3,409 3,713 1,326 1,382 1,613 0.6 0.7 0.2 0.2 0.2 Revenue growth is estimated to be 6.0 per cent in 2015-16, driven by the boost to transfer duty, land and payroll taxes that flow from a stronger economy. Revenue growth is expected to moderate to an average of 2.3 per cent over the budget and forward estimates as growth in both transfer duties and the State’s GST revenue decline and Australian Government National Partnership Payments fall. The State’s share of the national GST pool is expected to fall to its lowest level since the GST was introduced. This is due to the State’s comparatively strong economy lifting its capacity to raise state-own revenue relative to other states. Also affecting revenues is the Government’s commitment, made in the 2014-15 Budget, to abolish remaining business stamp duties listed under the Intergovernmental Agreement. Stamp duty on business mortgages, unlisted marketable securities and transfer duty on non-real business transfers will be abolished from 1 July 2016. Increased revenue to come from transactions announced by the Government will boost revenue from what is reported, once these transactions are completed. Expenditure growth will be managed on an ongoing basis consistent with the Government’s track record. Sound expense management enables the Government to increase spending in priority areas and invest in productivity-enhancing reforms. Over the budget and forward estimates, average expenditure growth is estimated to be 3.0 per cent. The Budget delivers growth in frontline services, with record budgets in the health, education, family and community services and justice clusters. Ongoing measures to drive efficiency in the public sector will support sustainable expense growth across the forward estimates. Government investment in infrastructure is at a record level, supporting the delivery of roads, public transport, schools and hospitals across the State (see Chart 1.2). The Government is continuing to implement the $20 billion Rebuilding NSW infrastructure program, made possible by recycling the proceeds of the partial lease of the State’s electricity network assets. These investments will support jobs and economic growth, and help prepare New South Wales for the demographic and economic challenges outlined in the NSW Intergenerational Report 2016. 1-2 Budget Statement 2016-17 Overview Chart 1.2: State-funded capital expenditure program (a) 16,000 Average: $12.1 billion (b) 14,000 12,000 Average: $9.1 billion $ m illions 10,000 Average: $6.1 billion 8,000 6,000 4,000 2,000 0 2008-09 Actual 2009-10 Actual 2010-11 Actual 2011-12 Actual 2012-13 Actual 2013-14 Actual 2014-15 Actual Other State Funded Infrastructure Program (a) (b) 2015-16 Revised 2016-17 Budget 2017-18 Estimate 2018-19 Estimate 2019-20 Estimate State Funded PPP Projects The State-funded capital program includes expenditure in the general government sector, public transport public non-financial corporations (PNFCs), Darling Harbour Live and the State-funded contribution to WestConnex. Does not include capital commitments funded from transactions that are yet to be concluded, including Ausgrid, Endeavour Energy and Land and Property Information. While net debt is expected to be very low at $0.7 billion by the end of June 2016, net debt is projected to reach 3.7 per cent of gross state product (GSP) by the end of the forward estimates. However, this does not include the proceeds of transactions already underway. This is consistent with the State’s asset recycling strategy, which supports investments in productive infrastructure that will help underpin future State prosperity. The successful conclusion of the State’s long-term partial lease of Ausgrid and Endeavour, expected in 2016-17, will further boost cash receipts into the State and will reduce net debt below the forecasts. The Government remains committed to ensuring a strong and sustainable balance sheet, consistent with maintaining a triple-A credit rating and the Fiscal Responsibility Act 2012. The Government is embarking on an ambitious financial management reform to strengthen financial oversight, facilitate data driven decision making, innovative service delivery and de-risking the balance sheet. Chart 1.3: General government net debt at 30 June (a) 30 25 $ billions 20 15 10 5 0 2015 2016 2014-15 Budget (a) 2017 2018 2015-16 Budget 2019 2020 2016-17 Budget Does not include proceeds from future transactions. Budget Statement 2016-17 1-3 Overview 1.3 Economic outlook New South Wales has a diversified service-based economy and remains well placed to continue to benefit from the nation’s current transition away from mining. Asia’s increasing demand for services – such as finance, education and tourism – is also helping to boost growth and employment in the State’s services sector. New South Wales continues to outperform the rest of Australia, with growth in NSW domestic demand more than four times stronger than the national average. As a result, NSW GSP is estimated to expand by an above-trend pace of 2¾ per cent in 2015-16. Above-trend economic growth in New South Wales is expected to continue over the next two years, with GSP forecast to grow at 3 per cent in 2016-17 and 2¾ per cent in 2017-18. The outlook is supported by historically low interest rates, solid population growth and a lower Australian dollar. Continuing strength in household consumption and dwelling investment means that state final demand (SFD) is expected to grow by 3½ per cent in 2016-17, before moderating to 3 per cent in 2017-18. Non-mining business investment, public investment and net overseas service exports are also expected to contribute to growth over the next few years. Chart 1.4: State final demand 7.0 Forecast Annual growth per cent 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 2010-11 2011-12 2012-13 New South Wales 2013-14 2014-15 2015-16 2016-17 2017-18 Rest of Australia Government programs promoting employment and new dwelling investment, together with a record level of infrastructure spending, will continue to contribute to these strong outcomes. The relative strength of the NSW economy is drawing labour and capital into the State, particularly as resources are being freed up from the mining investment boom. Net outward migration to other states is near its lowest level since the late 1970s and the State’s share of net overseas migration has picked up to its highest level since the early 2000s. Population growth of 1½ per cent is expected to continue over the next two years, supporting growth in consumption, dwelling investment and employment. The NSW labour market has performed strongly over the last year, with employment growing by 3.9 per cent. The unemployment rate has declined to 5.2 per cent, currently the lowest in the nation, and the workforce participation rate has picked up to near record highs. This is expected to continue over the next two years, with employment forecast to grow by an above-trend rate of 1¾ per cent in 2016-17 and 1½ per cent in 2017-18. The unemployment rate is expected to gradually decline to 5 per cent over the next two years. These positive outcomes are within the context of a global economy that is forecast to improve modestly over the next year or so and a national outlook that remains relatively subdued. While there is a downside risk of weaker global and national growth, the low interest rate environment and the possibility of further interest rate cuts pose an upside risk to domestic demand. 1-4 Budget Statement 2016-17