With teachers, nurses and paramedics crying out for better pay, Opposition Leader Chris Minns has promised to scrap the government-imposed limit on public service wages, in a bid to stop a mass exodus of workers from frontline services.
Treasurer Matt Kean said raising wages in line with inflation would be an "economic disaster".
"This will blow a budget black hole ... if wages track inflation," he said on Monday.
"What Labor needs to be upfront with the public about is whether they're going to blow the budget or deliver for their union mates," he said.
Unions in NSW have pointed to inflation rates of well over five per cent when calling for wage increases for their members.
But Labor says it has not promised inflation-level pay rises, insisting any increase in wages for essential workers will be offset by productivity gains, budget offsets and savings that leave the budget no worse off.
"Increases will only be funded by budget savings and productivity gains," Mr Minns said on Monday.
"We're serious about that," he told reporters.
He accused the government of "running a scare campaign to hide the fact that three quarters of healthcare workers and teachers are thinking about leaving NSW to go to another state where conditions are better".
The teacher shortage was the worst in the state's history, while emergency departments were experiencing an unprecedented crisis, Mr Minns said.
The government said Treasury analysis shows if wages rise in line with the inflation forecast it will cost an additional $8.6 billion over four years.
The latest ABS CPI indicator, which showed an even steeper inflation rate, would cost the state $11.1 billion over four years.
Premier Dominic Perrottet said 41 per cent of the state's budget was spent on public servant employment costs.
"That's why we have a wages cap. It's incredibly important and prudent," he said.
"Without having that cap in place what you will see is wages increase beyond control."
The coalition will cap public service wage growth at three per cent, or 3.5 per cent where productivity-related savings can be identified.
Mr Perrottet said with the state facing "significant economic headwinds" investment in infrastructure was crucial to keep the economy moving.
He called the wage cap, "the most fundamental point" that had enabled recent government spending in schools, hospitals and transport infrastructure.
Mr Perrottet noted his government had a planned investment pipeline of $116 billion over the next four years.
"Our policy, at three per cent, demonstrates what the fiscal capacity of the state is to invest in infrastructure and service delivery," Mr Perrottet said.
"There is not some magic money fairy. Under (Labor's) policies, our state will ground to a halt."
