Ratings agency Moody's says NSW's debt burden will be determined by whether it contains heavy infrastructure spending to the one-time revenue it will get from the sale of the state's electricity assets.
Moody's, which has a `AAA' rating on NSW's long-term debt, said it will conduct an in-depth analysis of the state budget and its medium-term impact on its financial and debt profile.
On Tuesday, the NSW government forecast a higher-than-expected surplus of $3.7 billion for the 2016/17 financial year in its state budget, thanks in part to the booming Sydney housing market.
It also outlined record infrastructure spending of $73.3 billion over the next four years, $22 billion expenditure for health in 2016/17, and another $14.3 billion for education in 2016/17.
As a result, net debt is expected to jump to $7.5 billion in 2016/17, from nearly zero now.
The spending is to be largely funded out of the proceeds of the recent $10 billion Transgrid sale, and partial sale of Ausgrid and Endeavour Energy.
Moody's said NSW's operating results over the next few years show a slight weakening compared with last year's forecast, due to an expected slowing in revenues to 2.3 per cent annually, while expenditure is slated to rise by 3 per cent.
"Going forward, the state's ability to constrain current expenditures will be critical to maintaining positive fiscal outcomes, particularly given the potential volatility in conveyancing duties which would occur in the event of a housing slowdown," Moody's said in a statement.
It said the state's deficits are forecast to be higher than previous projections but added the numbers are distorted by the exclusion of proceeds from the asset sales in the estimates.
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