Friday, November 30, 2007
A weaker U.S. economic forecast has changed the state�s budget outlook. General fund revenues now are forecast to fall $739 million (2.2 percent) below end-of session estimates, while spending is projected to be $66 million (0.2 percent) higher. A budget deficit of $373 million is now projected for the biennium. Previously a balance of $294 million had been expected.The forecast notes strong second and third quarter growth but, relying on a forecast for the U.S. economy for 2.2% GDP growth in 2008 and 2.3% in 2009. The revenue reductions come mostly in corporate income tax and sales tax revenues. As we've noted, the decline in corporate profits is already ongoing.
There are two points worth noting. First, the budget reserve is $653 million and the cash flow account has another $350 million. (There's a small pot of money for Human Services funding untapped, too.) So one could easily carry on spending at projected levels without any increase in taxes. So news reports that "this might be "the tip of the iceberg" or that tapping the reserves might hurt our credit rating are pretty thin gruel. It's probably also not the time to make major spending cuts; I don't see those as necessary on macroeconomic grounds. (I would favor them on efficiency grounds, but that's a different story.)
The reason takes me to the second point. The use of Global Insights as the forecast driver (meaning their national numbers are being used to project state revenues) puts us on the low end of the economic forecasts out there. In the November WSJ Economic Forecasting Survey, GII's Nahraman Behvaresh put in a forecast of 0.7% for first quarter 2008 vs. 1.9% average for the survey, 1.6% vs. 2.4% for Q2. Following up on something I wrote yesterday, if you set those growth rates low, they have substantive impact on growth for the rest of the biennium, as they push down revenue generation for 3/4 of the period, not just those two quarters. (GII isn't far off the average survey for the rest of the survey.) Now it may be that Global Insights and, by extension, the Finance Department are right on this forecast. I'm already on record making the probability of recession up here in the local area around 40%. GII is not forecasting a recession as its baseline, but has an alternative blended model with a weight of 35% on a national recession scenario. Most economists in the recent NABE Outlook do not foresee a recession. Today's weak consumer spending report has made some revise their estimates downward, though.
Revenue forecasts tend to be pessimistic, because the costs of errors are asymmetric -- nobody minds finding extra money under the stocking five months before the end of the biennium, but a shortfall causes pain. Not to suggest that Finance is writing something gloomy (even if people do think Tom Stinson is sobering and careful), but it's a very brave forecaster who would have bucked Global's negative outlook ... and I'm not one of them either. Still, it will be hard to imagine the story getting much worse than this forecast unless there's some additional shock to the system. The biggest risk would be oil prices staying higher than $80 a barrel through next year.