Drop in GST revenue to cost NSW 'more than COVID'

Daniel Mookhey says an expected $11.9 billion four-year drop in income will almost certainly mean NSW loses its top-line AAA credit rating, threatening to blow out already rising borrowing costs.

But he 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 Grant Commission were expected to cost NSW nearly $12 billion in the coming four years, Mr Mookhey said.

"That's the equivalent of about 19,000 health care workers, that's 16,000 teachers ... $11.9 billion is how much we spend on mental health, TAFE and the NSW Police Force combined every year," he told ABC Radio on Monday.

"To put this in really stark relief, NSW has lost more revenue with the Commonwealth Grants Commission than we did during COVID-19."

The "absurd" GST decision would also endanger the state's two remaining AAA credit ratings, Mr Mookhey

The loss of those ratings would likely push up the cost of borrowing to finance government spending.

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.

In a speech to the McKell Institute on Monday, Mr Mookhey is expected to say that the June state budget will continue the Labor government's focus on cutting gross debt.

But the state's remaining AAA credit ratings would "almost certainly" receive a downgrade as its finances went "back to square one", he will say.

"I think protecting family budgets takes precedence over the AAA credit rating and I think having the flexibility to respond to the risk of recession is more important than the AAA in the current economic climate."

Federal assistant treasurer Stephen Jones said his government was still in discussions with NSW about the distribution of funds under health, education and other deals.

"In the area of health, we're negotiating with NSW and other states around the new health and hospitals agreement," he told ABC Radio.

"We're in discussions around the NDIS, we've provided a record new injection into housing funding - $2 billion last year alone."

NSW is rated AAA by global credit rating agencies Moody's and Fitch, while Standard & Poor's cut its rating to AA-plus in 2020.

Australian Associated Press