A SOFT economy and government revenue decline have cancelled out the benefits from a prospering property market to deliver a big blow to NSW's bottom line.
Despite initial budget forecasts for a $1.89 billion deficit in 2013-14, NSW is now on track to plunge to about a $2.5 billion deficit.
The $656 million downfall will push out NSW's target for a surplus to 2016-17, according to the Half-Yearly Review released on Thursday.
NSW Treasurer Mike Baird said a fall in payroll tax revenue, despite the "shining light" property sector, contributed to the position.
He also attributed a shift in budget accounting and employee and superannuation expenses to the negative revision.
The NSW government is still reaping the rewards of a strengthening property market with stamp duty growth expected to exceed budget forecasts by between three and four per cent.
But the outlook shows it will not be enough to overcome the forecast $166 million decrease in payroll tax revenue for 2013-14.
"Over the budget estimates, yes, stamp duty is up but it is pretty much offset by the payroll," Mr Baird said on Thursday.
"So the payroll weakness has come off (due to) two factors.
"Wages growth is not as strong and a slighter, weaker employment rate ... so that has driven the revenue down in terms of payroll." Property Council of Australia NSW executive director Glenn Byres said the stamp duty results showed the property market was one of the viable areas of the economy.
"Where we need to be cautious is stamp duty is a volatile source of revenue, so the state will need to immune itself against sudden shifts," he told AAP.
Mr Byres said the real challenge was making the property market upturn go past the usual "ebb and flow" cycle of one or two years.
Mr Baird said the budget would be in a worse position if not for the lease and sale of assets such as Port Botany and Kembla.
The asset sales have helped prop up NSW's infrastructure spending.
Mr Baird conceded the state had challenges but said he was not alarmed.
He also did not rule out further revenue raising actions to bring the books back into the black.
Based on figures from a new budget accounting standard that incorporates changes to how superannuation is treated, NSW is forecast to achieve a $320 million surplus by 2016-17.
That is later than the June forecast of a $157m surplus in 2015-16.
The NSW Business Chamber says it's not surprising payroll tax receipts are lower than expected with business confidence in the "doldrums" for two years.
"The NSW Business Chamber has long been a critic of payroll tax as a burden that does not encourage employers to hire new staff and is a perverse incentive to reduce employment during economic downturns," chief executive officer Stephen Cartwright said.
Opposition Leader John Robertson said it took an extraordinary level of incompetence to have tax takes, record dividends and job cuts but not a balanced budget.
"What this shows is this Liberal government with a treasurer in Mike Baird is inept and incapable of delivering a budget that is going to sustain NSW going forward," he said.
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