The weaker-than-expected sales in the NSW housing market have contributed to a predicted $392 million hit to stamp duty revenue - a key source of support for state coffers - to June 2025.
Expenses have also blown out $1.4 billion since the June budget, pushing out the 2024/25 deficit from $3.63 billion to $4.98 billion.
However, the NSW treasurer on Wednesday was confident the immediate dip could mostly be clawed back with improvements over the following three years.
NSW Treasurer Daniel Mookhey's mid-year budget update offered little good news. (Dean Lewins/AAP PHOTOS)
"The government's budget position is holding, debt's down which in this economy is mildly encouraging," Daniel Mookhey said during his mid-year state budget update.
Gross state debt is forecast to reach $199.9 billion within four years, according to the update delivered on Wednesday.
A stronger jobs market and real wages growth should lift payroll tax while NSW expects to claw back a sliver of the $12.6 billion in forecast GST payments taken away in March.
Protracted troubles in the state insurance sector however have increased expenses in the current fiscal year by almost $1b.
"Turning around our state's insurance schemes is diabolically complicated," Mr Mookhey said.
Expense growth was also blamed on $1.2 billion in increased demand for government programs, including a larger-than-expected take up of energy bill relief.
A $6.6 billion increased spend on public-sector wages over four years is fully offset and will add no additional debt, the Labor government said.
The update also accounts for Sydney Water's acknowledgement that $440 million in deferred tax payments had been wrongly classified as current tax payments, changing revenue forecasts.
It comes after a June budget that was cast as one focused on "must-haves", leaving few sweeteners for cash-strapped families.
Since then, several major wage deals have been struck, including an average 26 per cent lift for police over four years.
Agreements are yet to be sealed with other key workers seeking significant pay rises, such as nurses and train drivers.
Taxpayers have so far been spared the pain of higher interest bills as the state holds onto two coveted triple-A credit ratings from Moody's and Fitch.
The other major credit-rating agency, S&P, in November held its AA-plus ranking while downgrading the state's outlook to negative out of concerns about rising wages and the growing debt burden.
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