SYDNEY - Australia's most populous state, New South Wales, goes to the polls on Saturday (March 23) in an election that could hold worrying signs for Prime Minister Scott Morrison.

Despite the state having one of the strongest economies and historically low unemployment, the ruling Coalition faces a heavy backlash.

Polls suggest voters are split 50-50 between the Coalition and the Labor opposition and there could be a hung Parliament. This would be a poor result for the Coalition, which won 54 of the state's 93 Lower House seats in the 2015 election.

The declining support for the government has been credited to anger at Mr Morrison's federal Coalition, which has alienated voters because of its infighting. But there has also been public anger at the State Government's moves for a costly project to rebuild two of Sydney's main sports stadiums, plus concerns about growing congestion, drought, rural water supplies and the impact of climate change.

New South Wales (NSW) Premier Gladys Berejiklian replaced the former Coalition leader in 2017 and is vying to become the first woman to win a NSW state election. She is known as a hard-working pragmatist but is a lacklustre media performer and has struggled to deliver a strong message about the state's economic health and its large-scale spending on rail and roads.

However, Ms Berejiklian's prospects suddenly improved this week as Labor leader Michael Daley suffered a terrible end to his campaign.

On Monday night, a video emerged in which Mr Daley appeared to blame Asian migrants for adding to Sydney's congestion and rising home prices, which have forced some younger people to leave the city.

The video was filmed during a community event held last September, two months before he took over as Labor leader.

"Our young children will flee and who are they being replaced with? They are being replaced by young people from typically Asia with PhDs," he said in the video.

"It's not a bad thing because Asian kids are coming to work here, it's a bad thing because I'd like my daughter to live in Maroubra (a Sydney suburb) rather than St Kilda (a Melbourne suburb)."

The comments forced Mr Daley into damage control, especially as several tightly fought seats in Sydney have large Asian migrant communities, particularly from China.

Mr Daley apologised, saying he had been making a point about housing affordability. He has otherwise been particularly welcoming of the growing Chinese-Australian community in his electorate.

"I could've expressed myself better," he said. "No offence was meant."

But the Labor party was taking no chances and paid for several advertisements in local Chinese community newspapers as it tried to fend off accusations of racism from Asian community groups.

Ms Erin Chew, founder of the Asian Australian Alliance, an organisation which advocates on behalf of the local Asian-Australian community, said Mr Daley's comments were "targeted at Asians, and Asians from specific countries - China, Indonesia, Malaysia, Singapore".

"It is extremely racist and offensive," Ms Chew told Nine media.

"He needs to make these comments with more sensitivity. It's very problematic coming from someone who could be the next premier of NSW."

The gaffe disrupted Mr Daley's campaign and damaged his attempt to portray himself as a no-nonsense, safe prospective premier.

Mr Daley's troubles continued on Wednesday night when he resoundingly lost a televised debate with Ms Berejiklian. He stumbled over policy details, including about his plan to boost funding on education.

NSW, which has a population of about eight million people, has one of the country's healthiest economies, with an unemployment rate of 4.3 per cent, the lowest in the nation.

But its fortunes are rapidly changing due to the sudden end to Sydney's housing boom, which has provided a steady source of revenue from state taxes on property sales. The state is headed for a budget surplus of A$846 million (S$811 million) this year, but revenue from property sales has sharply declined in recent months.

Whoever wins will likely have a difficult task as the state's economy slows but the result will also be seen as a measure of Mr Morrison's fortunes.

In two weeks, he is expected to announce a federal election, which is due to be held in May. Opinion surveys show his federal Coalition is well behind Labor - and a poor result in NSW will be seen as confirmation that his prospects are grim.