The NSW government has "baked in" 2.5 per cent annual pay rises for the state's public servants over the next four years after attempting to freeze wages to fund fiscal stimulus amid the COVID-19 pandemic.
Treasurer Dominic Perrottet said the government would in Tuesday's budget return the annual public servant pay rise cap to 2.5 per cent.
It would then meet that cap over the budget's forward estimates.
Public servants in NSW last year received a 0.3 per cent pay rise after the NSW government took the matter to the Industrial Relations Commission.
The government had attempted to freeze pay rises entirely amid the pandemic but the NSW upper house intervened, forcing the government to retain a 1.5 per cent cap.
"We always said when we spoke (last year) that when we could return and increase wages, we would," Mr Perrottet told reporters on Monday.
"We've been able to do it because of the strong foundations we laid, the stimulus, our focus on keeping businesses in business and people in jobs."
There are about 400,000 public servants in NSW and their pay rises will cost $2.7 billion over the next four years, the largest of this year's budget measures.
But unions say the government's re-elevation of the pay rise cap doesn't go far enough and the cap should be scrapped entirely to maximise wages growth.
A paramedic strike scheduled for NSW budget day will go ahead despite Mr Perrottet's announcement, with unions seeking a 4.5 per cent pay rise.
On Tuesday, paramedics will only attend call-outs deemed life-threatening.
Unions NSW secretary Mark Morey said public sector wages policy in the state was simply returning to its substandard norm.
He called for the government to go beyond 2.5 per cent pay rises and adequately compensate public service workers who last year received a negligible pay rise, despite working on the COVID-19 front line.
He also said NSW paramedics were among the worst paid in Australia.
"They've re-announced a policy that was atrocious, then went to really terrible and is now back to atrocious," Mr Morey told reporters.
"There's no reason to pat themselves on the back.
"The RBA governor is calling for wage increases of 3.5 per cent and as the largest employer in Australia, the NSW government has a responsibility to ensure there's wages growth so there's economic and jobs growth."
Mr Perrottet said he was disappointed Tuesday's paramedic strike would go ahead and admitted progress on the dispute was lagging.
He said an annual 2.5 per cent pay increase was well above the private sector wage growth average, as well as current inflation levels.
But Health Services Union NSW secretary Gerard Hayes said the state was "staring down the barrel of a retention crisis" due to pay levels.
"Our paramedics are seeking a very basic pay rise that allows them to do their job with dignity and respect," he said in a statement.
The government has spent almost $30 billion in stimulus amid the pandemic.
Other budget announcements on Monday included almost $110 million for youth mental health treatment, $8.5 million for refugee support programs and more than $21 million to expand specialist cardiac services.
Australian Associated Press