It is difficult to balance budgets with current economic forecasts
March 3, 2008
People often ask why the economy is a factor in state government spending. They see in this uncertain economic time the federal government getting ready to ramp up spending, such as the $154 billion stimulus package that will send money to families. Why can’t state government do the same thing?
Unlike the federal government which borrows money when it has a deficit, money that our children and grandchildren will have to pay back, Alabama state government can never borrow for operations and programs. By our state constitution, we can only spend what is raised in taxes in any given year, and deficits are not allowed. Sales and income taxes pay for schools; severance and other business taxes pay for things like public safety and health care. If the economy stumbles, receipts go down, and the money going into state coffers for critical needs starts to dry up.
That is why in the Alabama budgeting process, spending plans for everything from textbooks to state troopers are based on revenue projections for the year. Right now we are trying to figure out how much revenue will be generated by next year’s economy for next year’s budgets.
Budgeting this way is sometimes a tough business. When receipts are down, we must cut. For example, more than a dozen times since the fifties we’ve had our schools go into proration, the practice of slashing education spending right in the middle of the school year when taxes receipts have failed to meet budgets. Teachers are let go, good programs are cut to the bone, and it takes years to recover.
As it stands right now, schools would be in proration today because of the recent economic downturn. However, we saved money over the recent strong economic years in rainy day accounts to cover the current deficit. We will spend most of our reserves covering this year’s shortfall, and with the economic uncertainty prevailing, it doesn’t seem that revenue growth will reach what it was in recent years.
That is why economic forecasts are so important; they provide revenue estimates that are central to budgeting. You have to know what you have before deciding what to spend.
What has the House concerned is the major differences in economic forecasts from what the governor predicts and what the Legislative Fiscal Office calculates on economic growth. It is not a small difference. Fiscal Office numbers estimate that the governor’s education budget spends $176 million more than LFO estimates will be collected. The governor’s budget in non-education spending is $341 million short than what the Fiscal Office believes will be collected in revenue.
The governor’s revenue estimates for the education budget alone cuts almost $400 million from current spending levels, or approximately six percent, because of the revenue shortfall. It is a heavy reduction for one year. Cuts will have to be made. The question is where?
Now there is no exact science to economic forecasts. The old saying is that you can get five economists in a room and come up with ten estimates on how the economy will be doing a year down the road. However, the wide difference between the two sets of numbers has us all realizing we need to take time to see where our economy is headed, and gain as much information on revenue as possible before making tough decisions.
Let us hope the national economy picks up again, and that both LFO and the governor underestimate what the economy will look like in 2009. The problem is we need to make decisions on next year in the next months, and if history has taught us anything, it is how difficult that is to do.