Unions say a NSW government cap on public servants' annual pay rises will blunt their spending and delay the economy's recovery from recession.
With the state budget two weeks away, the NSW cabinet on Monday ditched its commitment to give public servants an annual pay rise of up to 2.5 per cent and instead agreed they would get up to 1.5 per cent.
The government argued it needed to strike "the right balance" amid the COVID-19 pandemic as private-sector employees take pay cuts or lose their jobs.
"We think that's fair and reasonable," Treasurer Dominic Perrottet said.
But Unions NSW Secretary Mark Morey said the government was "swimming against the tide" on stimulating economic growth, given low interest rates and federal government tax cuts.
The state government was responsible for one in ten NSW jobs, he said.
"What we know is that if you cut the wages and conditions of public-sector workers, you are condemning the economy more broadly to lower growth and also baking in a wage freeze for all workers in the economy," Mr Morey told reporters on Tuesday.
"This is a small but significant stimulus measure which puts money in the pockets of average workers... who will spend it in their communities and will contribute to growing the economy."
Mr Morey said NSW unions would stick to their promise to avoid industrial action amid the pandemic. However, they would now begin a "three-year battle" before the 2023 state election to change public sentiment on the issue.
The move to lower public sector wage rises comes after the NSW government asked the same workers in May to accept a 12-month pay freeze, which would be reinvested in job-creating projects.
Unions and the NSW Labor opposition fought that measure, and the Industrial Relations Commission recently deemed there would be a 0.3 per cent pay rise.
Opposition Leader Jodi McKay said the treasurer was guilty of "terrible deception", adding that public-sector wages influenced private-sector demand.
"He would argue that's a stimulus measure but it's not. He's done this under the cover of COVID and the recession and this is his longer-term plan ... he's had every intention of doing this from the beginning," Ms McKay said.
"We need a strong public sector to get us through this difficult time but we also need a public sector who knows that they are valued.
"Make no mistake, this is actually a pay cut."
The Public Service Association said in a statement the treasurer had "absolutely disrespected NSW public sector workers who stopped COVID-19 in its tracks".
The government will outline its plan to limit public-sector wage increases in its November 17 budget. The state's unemployment rate is currently 7.2 per cent.