A TOUGH mini-budget will not be enough to ensure the state's creditworthiness is not downgraded, credit ratings agencies have warned the State Government.

The agencies said they were focused on the Government's willingness to make, and implement, tough decisions, and were not convinced the Premier, Nathan Rees, and Treasurer, Eric Roozendaal, would work to cut the blow-out in public sector costs.

In talks with NSW Treasury officials, the ratings agency Moody's Investors Service has questioned the Premier and Treasurer's focus on costs when compared with that of the former treasurer Michael Costa and former premier Morris Iemma.

"Moody's has explicitly asked if the new Treasurer and Premier would be as diligent as the previous treasurer and premier" in stopping the growth in public sector costs from outstripping revenue growth, the secretary of NSW Treasury, John Pierce, told a parliamentary inquiry yesterday.

This imbalance lies at the core of the state's budget difficulties. The ratings agency Standard & Poor's has attached a negative outlook to the AAA rating of NSW, while Moody's is waiting to see what policies are introduced to make up for the loss of revenue from the sale of the power industry assets.

"The mini-budget … will not be sufficient to have the negative outlook removed," Mr Pierce said, since Standard and Poor's is specifically focused on the Government's ability to enact unpopular decisions in the budget.

Mr Pierce expressed surprise at the speed with which the agencies reacted to the collapse of the electricity industry privatisation plans. "We always expected that if the sale didn't happen, the ratings agencies would be asking us questions. The surprise was just how quickly that has happened. They put us on negative outlook straight away."

He said they should have waited to see what policies would be implemented to rectify the looming budget imbalance. The weak property market has slashed the 2007-08 budget surplus to $128 million, from $700 million signalled mid-year, due to slumping stamp duties.

Mr Pierce said he "cringed" when Mr Iemma said a cut to the state's creditworthiness would cost $500 million over a five-year period. Mr Rees had used the same figure. "It did cause me to cringe," he said.

Mr Pierce said a downgrade would cost $110 million to $125 million a year in higher interest costs in four years' time, and that the $500 million figure reflected the cost of higher interest rates on the Government's entire borrowings, which would take several years to occur.

Mr Pierce said payroll taxes were likely to decline towards the end of the 2008-09 financial year, as unemployment rose.