The federal government announced on November 16 that it will not fund the planned upgrade for the 40-kilometre stretch, making it highly unlikely there will be any improvements for years.

An infrastructure review recommended no funding for the east (Katoomba-Blackheath) and west (Hartley-Lithgow) sections. The project was one of those in a group which "do not demonstrate merit, lack any national strategic rationale and do not meet the Australian government's national investment priorities".

It was among 17 projects to be scrapped in NSW and 50 across the country.

But work already in progress - including the Medlow Bath section and a stretch around Coxs River Road at the bottom of Victoria Pass - will continue.

Residents in both those areas were frustrated but expected the decision.

Medlow Bath Action Group president, Stephen Caswell, said the decision was unsurprising as the upgrade was poorly planned from the beginning. He said the project was ill-conceived and the previous government tried to "bulldoze" it through without guaranteed funding for a tunnel.

Mr Caswelll said the most "atrocious" part was that the previous state government started some sections of the work, worth hundreds of millions of dollars, without the certainty that the rest would go ahead.

"The $175m Medlow contract was Paul Toole's parting gift ... before going into caretaker mode and it was for preparatory works for a tunnel that he knew was never going to be funded by the current federal government. He did this knowing Jenolan Caves Rd, Wolgan Valley Rd and Megalong Valley Rd all needed state funding for urgent repairs."

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Residents have long argued that the 1.2 kilometre Medlow stretch of four lanes will only encourage overtaking and cause congestion as the road narrows back to two lanes at either end of the village.

"Two of the main goals of the 'upgrade' - improved safety and easing congestion - can be dismissed. We said all along that they'd ruin Medlow and not have money for the rest. And that's just what happened," Mr Caswell said.

The Hartley Valley Residents Association echoed the frustration, saying the $230 million contract for the Coxs River Road section was let just seven weeks prior to the March 2023 election, without bipartisan support from the then opposition.

A spokesman, Renzo Benedet, said: "The Cox's River Road project is a project to nowhere. It shows the flaw in not having one contiguous project with one overall funding and environmental approval. It is a project the Hartley Valley community did not want but will have to live with.

"It creates new problems for the local community. Traffic noise levels have now substantially increased following the decimation of the landscape. The quaint village feel of the Hartley Valley has disappeared. Traffic pinch points will be created at either end of the new road during peak times as two-lane traffic merges into one lane."

Mr Benedet said the whole Katoomba-Lithgow upgrade was "an example of what not to do".

"The project strategy, design, environmental approval, economic assessment, budgeting and funding, community consultation and state-federal cooperation are all elements where the project went off the rails. The communities of both Hartley Valley and Medlow Bath are now having to wear the consequences of a failed process and poor execution."

Macquarie MP, Susan Templeman, said under the Liberals and Nationals, the number of projects in the infrastructure investment program had blown out from nearly 150 to 800.

"Many projects lacked proper planning, didn't have informed costings and weren't ready for commonwealth investment.

"The independent strategic review found that the infrastructure investment program inherited from the former coalition government was undeliverable.

"The construction of east and west sections of the Great Western Highway upgrade is one of the projects that will not receive Australian government funding at this time.

"This decision, while disappointing for some residents, is not surprising. The project, including the proposed tunnel, are not a priority for the NSW Government as it withdrew funding in its 2023 budget.

"To ensure the best outcomes for Blue Mountains residents, the upgrade needs to be planned and delivered with an understanding of the entire scope of the project."

A spokesperson for the NSW Regional Roads Minister, Jenny Aitchison, reiterated the continuation of the Medlow Bath and Coxs River Road projects.

"Together, the Australian Government and the NSW Government are investing $174.4 million towards the Medlow Bath upgrade. The Medlow Bath upgrade began construction in March 2023 and is expected to be completed in 2025," the spokesperson said.

"The NSW Government is investing $232 million towards upgrading the Great Western Highway at Coxs River Road, Little Hartley. The Coxs River Road Upgrade project began construction in April 2023 and is expected to be completed in 2025. The project is managed by Transport for NSW and funded by the NSW Government."

The proposed Blackheath to Little Hartley tunnel has been paused.