Australia's richest state has flagged a cloudy outlook for two of its biggest tax revenue earners, highlighting the broader concerns about the country's economy that is troubling regulators.
The NSW government's budget papers on Tuesday pointed to the housing market outlook as the largest risk to its forecasts, given the sector's capacity for large flow-on effects across the economy.
It also noted concerns about wages growth as an issue that could impact consumption and economic activity.
"A significant slowdown in dwelling approvals could see the pipeline exhausted and activity decline by more than expected in 2018/19. Higher than expected interest rates or a sharp decline in dwelling prices could also bring an end to the cycle," the budget papers said.
On the other hand, strong population growth or supportive government policies could boost demand and drive higher than expected activity, it said.
NSW's budget surpluses have been propped up on the back of the booming Sydney property market, with transfer duty on residential property accounting for more than 30 per cent of the state's tax revenue.
The continuing strength in the property market in Sydney, and Melbourne, has been a key factor in the Reserve Bank of Australia not cutting interest rates despite tepid economic growth.
Australian Bureau of Statistics figures released on Tuesday showed housing price gains of 14.4 per cent in Sydney and 13.4 per cent in Melbourne over the year to March were the driving force behind a nationwide 10.2 per cent rise in property prices.
The banking regulator also introduced fresh curbs on investor lending in late March in an effort to cool the overheated property market.
As a result, the state now clearly expects the housing market to moderate and has cut the growth forecast for residential transfer duty revenue to nearly halve to 5.9 per cent in 2017/18, and ease further to average 5.4 per cent over the next three years.
The other issue the RBA has repeatedly highlighted in recent months is weak wages growth and the impact this is likely to have on consumer spending.
On Tuesday, the NSW government signalled its agreement with the central bank's assessment, saying the outlook for wages growth is a key risk for the budget.
Payroll taxes contribute about 27 per cent of NSW's tax revenue.
Over the four years to 2019/20, the NSW government has cut its estimate for payroll tax revenue by $512.7 million.
