The state’s economic growth rate has moderated and Sydney’s property market has come off the boil.

The NSW budget is still in the black but the softer economic conditions are reflected in the latest forecasts.

The NSW half-yearly budget review, released on Tuesday, downgraded this year’s budget surplus to $1.1 billion. That's about half of what Treasurer Dominic Perrottet predicted it would be when he delivered his first budget 18 months ago. Next year’s surplus, which was forecast to be over $1.5 billion only six months ago, is down to $1 billion.

Those are still relatively healthy numbers of course – the state’s finances remain in good shape.

But the latest budget statement implies the very big surpluses delivered during this term of government are unlikely to be repeated during the next.

Whoever wins the March election could face more difficult economic and financial circumstances.

Tuesday’s budget report warned economic threats are building.

“The balance of risks has shifted more to the downside since the budget – with heightened policy uncertainty, financial market volatility and an escalation of trade tensions,” it said.

International financial institutions have revised down their expectations for global growth – a potential negative for NSW’s important export sector.

On the domestic front, it is very uncertain how the state’s debt-laden consumers will react to the recent slump in Sydney house prices.

“A key risk to the outlook is the way in which households respond to falling house prices, particularly at a time when debt levels are high and banks are tightening lending standards,” the budget review said.

The “negative wealth effects” caused by falling house prices could prompt households to cut back on spending. The property market downturn may also trigger a slowdown in construction activity, especially in the home building sector.

Meanwhile, the effects of drought are “flowing into lower farm production and rural exports.”

Despite these headwinds the budget review predicted state revenue to be a little stronger than previously forecast, due in part to a robust jobs market which underpinned an upward revision in payroll tax.

With an election looming the government has also loosened the purse strings.

Annual expense growth in NSW is estimated to be 5.4 per cent in 2018-19, up from 4.1 per cent predicted in the June budget. Average expense growth over the four years to 2021-22 is forecast to be 3.5 per cent, compared to the 3.2 per cent forecast in June.

The government considers its past economic record a key electoral strength and Mr Perrottet sought to capitalise on it when he released Tuesday’s budget review.

“Only a Liberal-National government can weather the headwinds coming our way and still deliver strong budget surpluses now and in the future,” he said.

Mr Perrottet labelled NSW Labor leader, Michael Daley, the “greatest threat” to the state’s financial position and claimed Labor would “plunge the budget into debt and despair.”

Expect to hear a lot more of that before the state election.