NSW Premier Nathan Rees has been warned it would be counter productive to raise business taxes and ditch a massive rail project as he grapples with a projected $1 billion deficit.

Mr Rees yesterday said he was “pulling back” from Sydney’s $12 billion North-West Metro Rail Link, and refused to rule out tax increases, prompting a strong response from the State’s business community.

The last State budget included a cut in payroll tax from six per cent to 5.75 per cent from January 1, with further gradual reductions to 5.5 per cent by January 2011.

The cost of this reduction was estimated at $1.9 billion over four years.

But when the cuts were announced, a $268 million surplus was projected for this financial year, and NSW is now on the verge of losing its Triple A credit rating, with falling revenues and massive budget blowouts.

Since assuming the top job on Friday, Mr Rees has sent mixed messages about his intentions regarding tax hikes.

He said Monday the Government had previously ruled out tax increases, and “always tried to bring downward pressure to bear on the various types of taxes

and that’s not going to change”.

But yesterday, he would only say his “inclination was not to increase taxes”, before adding that “nothing is being ruled in or out”.

The Sydney Chamber of Commerce added to pressure on the Government when it said it must push ahead with the North-West Metro rail link to cater for projected population growth.

Opposition transport spokeswoman Gladys Berejiklian also said the rail link should proceed.

Mr Rees said he was committed to the project up until the full extent of the State’s financial problems was revealed.

“I stood up at a local government fundraiser last week ... and I said ‘look the North-West Rail Link wasn’t dependant on the energy sale and will proceed’,” he said.

“That was before we realised what treasury was saying, which is over a course of a year you’ve got a billion-dollar shortfall.”

He earlier told Fairfax Radio Network: “I am pulling back from it.”