The NSW government is trying to offset a fall in one of its biggest property-driven revenue feeds by cutting spending as it heads into a low-growth economy.
But it remains exposed to the vagaries of the state property market, which is feeling the pinch of three consecutive central bank interest rate rises with no guarantee there won't be more to come.
Still, Treasurer Daniel Mookhey is confident he can rustle up a budget surplus in 2027/28, after the state election in March.
"We have put the budget in a much stronger position by bringing spending growth under control," he told parliament on Tuesday after handing down the 2026/27 budget.
Sydney University's Luke Hartigan thinks the treasurer's surplus forecast is "ambitious".
"If the economy starts to slow down a bit, then we should probably see some fall off in GST revenue (for NSW) as well," the School of Economics academic told AAP.
"So it's ambitious to think we'll have a surplus, considering most of the other states have big deficits and the federal government has a deficit."
And if the Reserve Bank continues to raise rates, given ongoing upside risks to inflation, there will be more downward pressure on the housing market and stamp duty revenue.
"It's just such an uncertain environment," Dr Hartigan added.
NSW will experience a near $2 billion slump in property transfer duty to $12.6 billion in 2026/27, and a $5.3 billion fall over the next four years, the budget papers show.
Interest rate rises had dampened sentiment and placed pressure on property prices, Treasury said.
The government does see some light at the end of the tunnel, but not until the second half of calendar 2027, when it believes interest rates will start to ease.
In the meantime, state economic growth will slow to one per cent in the next financial year, reflecting the war in the Middle East and its impact on energy prices, as well as the rates impact on household budgets and sentiment.
But Mr Mookhey remains upbeat, saying NSW was still growing and pointing to an improved two per cent growth over the next couple of years on the back of heightened investment in data centres and energy projects.
"In fact, private investment is now the leading source of economic growth in NSW," he told the NSW parliament.
"No other state can say the same (and) much of that investment is being driven by the renewable energy transition."
However, NSW is still facing a high debt burden with the state's liabilities heading to $193.8 billion in 2026/27, or 20.5 per cent of state gross domestic product, before rising over the next three years to $219.4 billion.
As a consequence, its interest bill will increase to $9 billion in the new year.
Still, Mr Mookhey believes he remains on track for what he hopes will be the state's final budget deficit - of $2.3 billion - in 2026/27 ahead of three surpluses out to 2029/30.
The first surplus of $1.1 billion is due to be booked in 2027/28, assuming the government is returned in the March poll.
Global credit ratings agency S&P said NSW needs to maintain that tight rein on spending to continue to support its AA+ long-term rating.
"Any delay in the improvements could pose downside risks to the rating," it said.
