Budget shortfalls due to the upcoming GST carve-up will hit NSW harder than the impact of the COVID-19 pandemic, the state's treasurer says.
Daniel Mookhey says an expected $11.9 billion four-year drop in income could cause his state to delay major school and hospital funding agreements with the federal government until after the June budget.
It could also mean NSW loses its top-line AAA credit rating, threatening to blow out already rising borrowing costs and deliver a further hit to the budget bottom line with growing interest payments.
But Mr Mookhey said protecting family budgets and jobs would take precedence, despite a predicted surplus for the current financial year slipping further out of reach.
Both NSW and Queensland are due to lose out in the GST distribution for the 2024/25 financial year because of their abilities to raise extra funds through mining royalties, while Victoria will gain billions.
The changes flagged by the Commonwealth Grants Commission were expected to cost NSW nearly $12 billion in the coming four years, Mr Mookhey said.
"Put simply, losing $11.9 billion is the equivalent of losing 19,000 healthcare workers ... (it's) enough to hire 19,000 teachers, or 16,000 police officers for the next four years," he said in a speech to the McKell Institute on Monday.
"$11.9 billion is how much we spend on mental health, TAFE and the NSW Police Force combined every year."
The commission's decision "will cost NSW more in lost revenue than COVID-19 did", he added.
The budget hit would also jeopardise NSW's support for major agreements, such as for shouldering more of the fast-growing financial burden for the NDIS.
"You should expect us to take our time finalising the key agreements we have with the commonwealth," Mr Mookhey said.
Federal Treasurer Jim Chalmers said it would be "easy, but wrong" to blame the Commonwealth for state budget pressures.
He pointed towards NSW receiving "billions of extra dollars" in funding for health, hospitals, housing incentives and in the no-worse-off GST guarantee.
Western Sydney would also be a "big priority" in the upcoming May budget, Mr Chalmers said, following accusations from the state government that the major growth region was being starved of infrastructure funding.
NSW has been pushing for GST to be shared on a per-capita basis, with the federal government topping up smaller states.
It receives less in GST per person than any other state except Western Australia, which gets a guaranteed floor amount under a deal negotiated with then-federal treasurer Scott Morrison in 2018.
NSW has also been joined by other jurisdictions in calling for four-year forecasts for the annual distribution to allow states to better plan their spending.
Mr Mookhey said reduced GST income would also endanger the state's two remaining AAA credit ratings but having the "flexibility to respond to the risk of recession" was more important in the current economic climate.
Shadow Treasurer Damien Tudehope said the state Labor government had promised no new taxes or increased borrowing and it needed to be clear with the public where cuts would be made to balance the budget.
