Next period of government in NSW will be an important test of Australia's future

While O'Farrell has indicated that a Coalition government will cut the bloated public service given that related wages consume nearly half of the NSW budget, one of his spokesmen has noted that the Coalition "will need more public servants, not less to fix NSW". O'Farrell's treasury spokesman Mike Baird has also suggested moving to a profits-based mining tax rather than the present royalties scheme, although such a reform may not be enough.

As Jessica Irvine points out, other policy options may be considered. This includes placing more pressure on local councils to speed up higher density housing in order to ease the housing squeeze. At present, NSW (31 per cent of Australia's population) builds just 19 per cent of all new homes whereas Victoria (25 per cent of population) builds 36 per cent.

Irvine also suggests more user-pay principles, including higher fares to boost NSW's transport system.

She also discusses the possibility of more public spending given that a decline to a AA+ credit rating may not mean much higher interest rates costs. Irvine notes that when Queensland downgraded to AA+ in 2009, it paid 5.97 per cent, just 0.1 percentage point more (5.97 per cent). In the case of NSW with a debt of $37 billion, this would mean an extra $37 million of interest per year, as long as interest rates did not increase.

But the future of NSW, regardless of the Coalition's recent policy announcements, will also depend on the well-being of the international economy, as it always has. As Bill Bonner suggests, it remains to be seen what will happen to economic growth if the US stops printing money given that the QE2 stimulus (pumping an extra $4 billion per day into the US economy since last November) is due to expire in June.

And if the Reserve Bank is forced to adopt higher interest rates to tame inflationary pressure, the burden on people will compound in a state with highly indebted households.

In such circumstances, we may hear more arguments to reform Australia's fiscal distribution practices, as indicated by Irvine who argues that states are presently forced "to beg for handouts from Canberra, supplemented by a grab bag of volatile property taxes, payroll, mining royalties and gambling charges".

Nevertheless, in a best case scenario without another major world recession, the failure of the NSW Coalition to find an effective policy approach will have consequences. As Irvine reminds us, a failure to address "creaking infrastructure and expensive mortgages" may mean greater hostility to new arrivals.

To conclude, the NSW Coalition's victory at the 2011 state election and its policy response will indeed provide a considerable test of a state government's ability to meet various economic, social and environmental needs. Whether one is a NSW resident or not, the Coalition's policy response will signal interesting times ahead in regards to the Australian political experience.