Standard & Poor's has put the NSW Government's credit rating on a negative outlook, meaning a downgrade is possible within the next two years.

The New South Wales Government currently holds the highest AAA rating, but S&P says there is increasing pressure for the state to spend more, while revenue remains stagnant.

"In our view, there are increasing pressures on the New South Wales Government to increase its investment in infrastructure," said credit analyst Claire Curtin in a statement.

"These capital expenditure pressures, combined with our view of the state's moderate budgetary performance, lead to our opinion that NSW's budgetary flexibility may become increasingly challenged."

The ratings agency says there is a one-in-three chance it will downgrade the state's credit rating within the next two years.

However, S&P says NSW could be revised back up to stable if the state's government can show steps to either increase revenue or raise money by selling assets, thereby allowing more infrastructure investment without increasing debt.

S&P says the state's Commonwealth backing, as well as its wealthy and diversified economy, positive financial management and excellent access to international funding are being offset by its moderate budgetary flexibility and performance, which reflect stagnating revenues and an increasing need to address the infrastructure backlog.

S&P says the state's financial management has improved over the past 18 months, due to tighter revenue and expenditure management, but it says long-term infrastructure issues continue to hang over New South Wales.