Budget NSW: Reserve Bank’s three interest rate rises blamed for deficit blowout from less stamp duty

The NSW Labor Government has blamed the Reserve Bank of Australia’s three interest rate hikes this year for dramatically reducing stamp duty revenue and causing a major Budget deficit blowout — and hinted Federal Labor was also a culprit.

In its last Budget before the next election in March, State Treasurer Daniel Mookhey has blamed an inflation surge for depriving it of lucrative property taxes whenever someone buys a home.

“From our perspective, the biggest factor that has led to a change in our outlook when it comes to stamp duty, and our expectations of the property market, are by far interest rates, and we have seen the impact that higher interest rates, in partnership with an oil shock have had on the New South Wales property market,” he told reporters on Tuesday.

While Federal Labor’s proposed changes to negative gearing and capital gains tax concessions weren’t mentioned specifically in the State Budget papers, finalised in May, Mr Mookhey said they were contributing to a property market downturn.

“From our perspective, the forecasts reflect our best professional judgement at the time in which they were reached, which does pick up the period immediately after the Federal Budget,” he said.

“But of course, we will expect to have to continue to monitor the property markets closely.”

With One Nation now outpolling Labor at a Federal level, Mr Mookhey also conceded voters in NSW upset at the cost of living could conceivably vote Labor out at the next State election, after just one term in power.

“Well, I think it’s clear that politics is undergoing a sea change nationally and in a State level and ultimately, it’s a reminder to the Finance Minister, to myself, to the Government that it’s the voters who get to decide their government in this democracy, and if the voters are not happy, they’ll throw us out, and as they have every right to do so, we work for them,” he said.

NSW is home to Australia’s most unaffordable real estate with the typical home with a backyard costing more than $1.5 million, even in a slowing housing market where mortgage stress is a burning issue.

Sydney house prices have been falling since February when the RBA began the first of its three rate hikes, which last month took the cash rate to a 15-month high of 4.35 per cent.

The city’s mid-point house value last month fell by 1.1 per cent, Cotality data showed, making it the worst-affected market, and Westpac is expecting property values in Australia’s most expensive market to finish the year 3 per cent weaker.

“The outlook for the property market remains a downside risk for the 2026-27 Budget,” NSW Treasury said.

“Higher residential property prices and corresponding household debt levels compared to any other Australian State or Territory, exposes the NSW property market to greater sensitivity to changes in interest rates.”

NSW Treasury Budget papers said a drop in property values would affect tax revenue.

“This has placed pressure on the Budget through a combination of higher interest expenses and pressure on some State revenues (e.g. lower projected transfer duty and land tax revenue),” it said.

Revenue from stamp duty and land tax have been revised down by $8.4b over the four years to 2029-30, with weaker stamp duty making up $5b of that revenue downgrade.

“A weaker outlook for the property market following a material shift in the cash rate has placed significant downward pressure on property prices and transaction volumes,” the Budget papers said.

Australia’s most populated State is forecast to have a deficit of $2.3 billion in 2026-27, which is much wider than the $1.1b deficit for the next financial year predicted as recently as December in Treasury’s half-year review.

But NSW Treasury is still expecting a $1.1b surplus in 2027-28, followed by a surplus of $1.8b in 2028-29 and $1.9b in 2029-30.

“Despite short-term pressures from global headwinds and new measures to support families, the NSW Government has continued to improve the operating position and remains on track for a return to surplus,” it said.

The surpluses were projected despite spending on infrastructure capital works increasing to $21.9b in 2026-27, up from $20.6b projected in December’s half-yearly review.

Gross state debt has climbed from 15 per cent of gross state product, in 2022 under the previous Coalition government, to 20 per cent under Labor, and is expected to his $178.5b by June 2026.

Unlike the previous Coalition government, NSW Labor is opposed to privatising assets to pay for capital works, which will mean more borrowing.

“The majority of state investment is through borrowings, with around 53 per cent of the general government infrastructure program projected to be funded by borrowings between 2025-26 and 2029-30,” NSW Treasury said.

“This Budget sees the Government maintaining its commitment to not privatise major assets to fund its infrastructure program.”

Public sector employee costs are also projected to increase to $53.3b in 2026-27, up from $52.8b forecast in December, making up 40 per cent of general government expenses with the Budget citing pay increases for nurses and midwives.

NSW was also expected to have a 3.75 per cent inflation rate by June 2027, or a level well above the Reserve Bank’s 2-3 per cent target.

The State’s Treasury has also revised down its economic growth forecasts for the next financial year to just 1 per cent, down from a 2.5 per cent level predicted in December.