Filling budget hole requires doing things differently

Last spring’s state budget battles didn’t end when the gavel fell. Education, social service and labor activists who felt betrayed by Democratic majorities have kept up their drumbeat of criticism. Cutting spending doesn’t win you many friends in Olympia, even when it’s the right thing to do.

For all the grief they took, lawmakers must have hoped that the fiscal patch would hold until after the 2010 election. No such luck. The precariously balanced budget barely survived the summer. Tax collections fell below expectations, ballooning the budget gap. Most expect the shortfall in the current two-year budget to exceed $2 billion. It may be much worse. Cuts become more difficult over time. A 10 percent cut over two years becomes a 20 percent reduction if it has to be taken in one.

Arun Raha, the state’s economic and revenue forecaster, puts a number on the misery Thursday when he delivers the last official forecast of the year.

High unemployment, depleted savings accounts, tighter credit and negative home equity make us frugal. While economists prattle on about the recovery, consumers aren’t buying it. Heck, they aren’t buying anything. That’s why tax collections are down. Consumers aren’t acting the way the economic models predict.

The forecast provides another forum for the usual suspects to make the usual arguments for increasing taxes to maintain spending. Labor unions are already saying they’ll target Democrats who won’t go along with them. Certainly, the impending budget reductions will not be trivial. More federal money for Medicaid, as is currently being discussed in Congress, will be helpful. Regardless, voters won’t accept tax hikes to prop up an unsustainable spending plan. There’s going to be no quick return to the pre-recession normal. Lawmakers must accept the changed reality, just as Washington families have.

Most states face similar challenges, with revenues seriously lagging projections. Raymond C. Scheppach, executive director of the National Governors Association, says “The bottom line is that states will not fully recover from this recession until late in the next decade.”

Here’s the bad news. Many of the jobs lost in the last two years will not return. Unemployment will remain high, with consumer confidence correspondingly low. Few now predict the hoped-for “V-shaped” recovery, with a sharp decline followed with a steep, swift ascent. We’re going to be crawling along the bottom for a while. As Raha notes, employers will put off hiring until they’re certain demand justifies it.

Lawmakers here can improve the odds that we rebound more quickly by making smart fiscal decisions. Although the depth and length of the recession has been extraordinary, our budget problems preceded the bust. In 2007, nearly a year before the recession began, lawmakers boosted spending at nearly twice the rate of revenue growth. Even then, budget analysts predicted the spending would set up a deficit in the next budget. But absent an immediate crisis, there was no appetite for restraint. Washington’s economy had generally outperformed naysayers’ expectations.

Now restraint must be coupled with a long-term perspective. It won’t be easy. Those who benefit from the way things are will always resist change. Sustainable spending need not result in Dickensian deprivation. But it will require that priority setting include a willingness to change the way the state does business.

Here’s a partial list of what I’m talking about:

Public employees continue to enjoy wages, health care, and pension benefits far superior to those offered in the private sector. Red tape makes it nearly impossible for businesses and nonprofits to compete with state employees for the opportunity to do government work. Union resistance to performance pay and charter schools stifle innovation and make it unlikely that the state will get its share of federal education reform money. State monopolies on workers’ compensation and retail liquor sales frustrate market competition.

A fiscal crisis requires political leaders to jettison the stuff that’s discretionary and get ruthless about reducing overhead costs. Taxpayers will not accept tax increases to preserve an unsustainable pattern of government as usual. They will support lawmakers committed to bringing spending under control while preserving essential services.

In time, economic recovery will restore revenue growth.



Richard S. Davis writes on public policy, economics and politics. His e-mail address is richardsdavis@gmail.com.