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Federal government funding cuts to services including in health and education have been described as "a kick in the guts" for NSW that will cost the state budget about $2 billion over the next four years.
NSW Treasurer Andrew Constance estimates that $1.2 billion will come from health alone, while the impact on education will be about $240 million.
Premier Mike Baird said the cuts were "a kick in the guts to the people of NSW" that could potentially harm the state's triple-A credit rating. He noted that one ratings agency already had the state on negative outlook before the federal budget announcement.
"Does the announcement last night potentially impact our credit ratings? Yes, it does," he said on Wednesday.
"The ratings agencies say, well, how are you going to meet that cost? So we do have a challenge."
Mr Baird and Mr Constance were responding to the budget handed down on Tuesday by federal Treasurer Joe Hockey, which will rip $80 billion from schools and public hospitals across Australia up to 2024-25.
From 2017, indexation of health and education funding will change to reflect the growth in population and inflation, instead of the amount of activity in each system.
At a news conference on Wednesday morning, Mr Baird challenged Mr Hockey to answer the question: "What services would he like us to cut here in NSW on the back of the funding cuts we've seen overnight?
"When we had our problems fiscally [and] got our house in order, we did not send the bill to Canberra," he said.
"What we've had last night from the federal government is a flick pass. It's cost shifting. And it says to this state: we have a problem, you work it out.
"Our message back to Canberra is no, we are in this together. You cannot outsource your problems to the state."
Earlier, Mr Baird had said the prospect of deep cuts to federal funding has "brought forward" the debate about whether the GST should be increased to cover them.
On ABC radio, Mr Baird described the announcement as "almost a game of 'tip and you're it - we now want the states to solve these challenges".
"Well, it doesn't work like that," he said.
Mr Baird said there was "a clear requirement" for the states and Commonwealth to come together "to work out how we solve this".
"Because we haven't got the financial capacity to meet the challenge being provided by the Commonwealth and we need to address it."
Mr Baird said the types of discussions that were necessary included whether the federal government would allow the states to levy a proportion of income tax - a recommendation of the recent Commission of Audit.
Asked if he believed Mr Hockey was seeking to "wedge" the states on the issue of an increase to the GST by requiring them to find a way to fund extra health and education services, Mr Baird said he remained a supporter of Mr Abbott's pre-election promise to have a "mature debate about tax reform".
"That should take place," Mr Baird said. "What we saw with events last night, that has brought that forward."
At his news conference, Mr Baird said he favoured a proposal previously brought to the federal government whereby a portion of income tax is quarantined for the states.
"I have been very upfront on this," he said. "If Canberra last night said we are going to quarantine some income tax to align with this expenditure responsibility, I'd be the first to give it a tick, because that's what I've been arguing for consistently.
"It makes sense. But I'm not going to prescribe that as the only course of action. What I'm saying is we need to have the discussion on tax reform [and] federalism and we need to align revenue and expenditures."
NSW Treasurer Andrew Constance said the state was also concerned about the impact of a $7 co-payment to visit a GP announced by Mr Hockey and "its potential impact on overwhelming our emergency departments".
“We need to have a long and detailed discussion with the Commonwealth about further details regarding this announcement,” Mr Constance said.
Mr Baird agreed with concerns raised by Mr Constance that the $7 co-payment would push more people into public hospital emergency rooms.
"We can't get queues a mile long in emergency departments, because that's going to be expensive and that's not an efficient way to run any health system," he said. "So we do need to consider that in detail."
Mr Baird said: "if it leads to long queues in emergency departments, well, that's not something that's sustainable."
The story Budget 2014: 'A kick in the guts' for NSW, says Premier Mike Baird first appeared on The Sydney Morning Herald.