Essentially the gauge difference problem is due to the dithering and intransigence of the NSW Government of the time and its incompetent Engineers-in-Chief.
A quote about SG from the 1905 paper linked above:
"Some people seem to think there is some magical charm, some peculiar virtue in this particular dimension to account for its prevalence and success. I cannot agree with them. I regard it as a mere accident, which, once established and being found tolerably satisfactory, spread and occupied the field, compelling other gauges of later date to give way to it, the evils of break of gauge being found far greater than the benefits of the few extra inches that gauge reformers in numerous cases added."
As Australia (or the 3 colonies as it was at the time) was starting with a clean sheet it didn't matter much which gauge was standardised on.
(The gauge of the Newcastle railway is unknown, only posited to be standard gauge. It would be very difficult to find a description of the locomotives used on the railway. Still I believe there is a plaque at Sydney's Central Station claiming to be the location of Australia's first railway, so who are we to argue?)
This discussion is mostly for historical interest although I think there is a case for a greater Federal contribution to SG-conversion projects in SA & Vic.