Millions of dollars will be cut from homeless services in Sydney under a "needs-based" funding model that attempts to stop the drift of people into the city.
The distribution of the state's $136 million annual budget for homelessness services will change from next year, with the introduction of a "needs-based" model.
Funds will flow to areas based on their socioeconomic make-up, with districts seen to have higher rates of homelessness "triggers", such as substance abuse and domestic violence, given more money.
This will ensure people in those areas who are homeless or are at risk of homelessness can find help locally, Community Services Minister Pru Goward says.
"We want to help end the all-too-common drift of homeless people to the inner city," she said in a statement on Wednesday.
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Services in the Hunter and New England region will have their funding boosted from $16.4 million in 2013/14 to about $18 million annually from 2014 to 2017.
The mid-north coast will have a funding boost from $3.48 million annually to almost $4.8 million.
But in Sydney, funding for services will be slashed from more than $45 million in 2013/14 to about $39.5 million a year from 2014 to 2017.
Labor MP Sophie Cotsis described the move as "outrageous and indefensible", saying it stripped funding from a place where homelessness is greatest.
"A government dedicated to putting the brakes on homelessness would be increasing budgets, not cutting them," she said.
Ms Cotsis said the new funding arrangement would also do nothing to address a lack of public housing.
"The public housing waiting list has blown out to more than 120,000 people, with many eligible families stuck on a waiting list for 10 years - and this is one of the major factors driving homelessness in NSW," she said.
Independent MP for Sydney Alex Greenwich said providers were potentially facing more people in need as the government considered selling public housing in areas such as Millers Point.
While he described the funding model's focus on early intervention and prevention as "commendable", Mr Greenwich said it also created much uncertainty for providers who would need to apply for funding every few years.
Ms Goward said $2 million had been distributed to services throughout the year to help them prepare for the changes.
Tenders for the funding will close on January 28, with new service contracts coming into effect from July 2014.
