Sydney’s thriving property market will help deliver a higher-than-expected surplus for New South Wales in the coming financial year, although the gain will be offset by a much weaker than expected income from mining royalties.

The NSW government forecast a surplus of $3.7bn for the 2016-17 financial year in Tuesday’s state budget, improving on the $3.2bn surplus predicted during its midyear budget review in December.

The government was also forecasting surpluses, albeit smaller ones, over the next three years, as revenue continued to flow in from housing transactions.

But the state treasurer, Gladys Berejiklian, expects to take a hit on the state’s accounts of about $1.7bn over the four years to 2018-19 thanks to a fall in coal prices and lower growth in coal exports.

Compared with its forecast a year ago, royalty revenues were down nearly $270m in the 2015-16 financial year alone.

“Key factors underpinning the 2016-17 budget forecast include continuing weak US dollar coal prices, slower growth in coal export volumes and a lower Australian dollar against the US dollar over the forward estimates,” state budget papers showed.

Benchmark prices for thermal coal – a key export for NSW – have tumbled over the past three years and currently hover around $US52 per tonne, in line with the prolonged downturn in the global commodities market.

The NSW government has now estimated prices to be about $US55 a tonne in 2016-17, down from its previous forecast of nearly $US 70/tonne in last year’s budget.

Berejiklian said NSW still expected to see “above-trend economic growth” over the next two years, with overall output predicted to grow 3% in 2016-17 and 2.75% in 2017-18.

Transfer duties from house sales, which make up more than 11% of government revenues, exceeded expectations in 2015-16. They were expected to continue growing over the next four years, although at a more subdued pace of 2.4% annually.

“While the current housing cycle is longer than previous cycles, historically low interest rates, strong population growth and continued supply limitations are expected to support activity,” the government’s budget papers said.

The state would also benefit from higher taxes – announced earlier this month – on foreign investors looking to buy residential property.

The NSW government flagged an expected reduction in its share from the national pool of GST revenue on account of strong economic growth. GST revenue in 2016-17 was expected to be $850.5m lower compared with 2015-16 and reductions of a similar magnitude are also expected in the following two financial years.

Net debt is expected to jump to $7.5bn or 1.3% of gross state product by the end of 2016-17, reflecting the significant increase in infrastructure spending.

The first stage of the Sydney Metro rail project linking northern and western Sydney would move closer to completion in 2019 with a $2.7bn cash injection, while $277m would going to light rail projects in Sydney’s central business district and south-east, Parramatta, and Newcastle.

The state government was also spending more than $400m to upgrade its trains and rail infrastructure and boost the number of services to booming western Sydney suburbs, while setting aside more than $1bn to buy more trains.

