That's a good point. I guess NSW has to run a few budget defecits. You have to remember that NSW has less debt on its balance sheet that most other states (as a % of GSP). I think given the fact that NSW is going backwards, its might be worth pushing the budget into the red for a few years.
The second point is that for every dollar of tax paid in NSW to the Howard government, it gets back around 80 cents. I'm sure if the government really turned up the heat on John Howard (ie. launched TV and radio campaigns for "educational" purposes), he would be more willing to put money back into NSW, where it belongs.
It is very important to remember that since Howard is the highest taxing government, the morwe tax that is collected, the more money NSW bleeds. In fact, at no time in Australia's history has NSW been paying more to subsidies other states.