The sluggish economic recovery took a nick out of last week’s official state revenue forecast. Lawmakers received the news with equanimity, accompanied by a few yawns. No one expects good news anymore, so less bad news is a relief. No cheers, though. It’s unseemly to celebrate a flat line.
The adopted forecast comes with just a 50 percent probability. The state economist says there’s a 40 percent chance that revenues will come in significantly below the baseline estimate. And it’s barely worth discussing the 10 percent probability that we’ll do a lot better.
In the current stagnation, the baseline forecast assumes revenues will grow 7.2 percent over the next two-year budget cycle. That’s the budget legislators begin writing in January. A lot of business leaders see bleaker projections. But even that growth will barely cover existing commitments.
Let’s look at the risks. The forecast council cites the usual parade of perils: Eurozone meltdown, the tricky business of a managed slowdown in China, political turmoil seething around the globe.
Domestic politics, though, are the greater threat. At the end of the year, absent presidential leadership and Congressional action, the nation heads off the fiscal cliff. That’s when the Bush-era tax cuts expire and the automatic spending cuts adopted in the 2011 debt ceiling negotiations kick in.
Higher taxes and reduced spending will strangle an already gasping recovery. The Congressional Budget Office says that unless Congress relaxes fiscal restraints the economy will go into recession in the first two quarters of 2013.
In a report published last month, the CBO writes that if Congress were “to remove or offset” the tax hikes and spending cuts “the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, well above the 0.5 percent projected … under current law.”
Tax increases are particularly damaging. The American Council for Capital Formation, a business group, commissioned an analysis by distinguished economist Dr. Allen Sinai. His research shows that, if the higher taxes go into effect in January, the “economy ends up losing 2.8 million jobs” a year between 2013 and 2017.
Sinai reports the downturn “would overwhelm any potential benefits to the federal government deficit.” We need a deficit reduction strategy, but this isn’t it.
The cliff analogy, while vivid, misleads. As we near the edge, the ground slopes. The consequences of inaction show up early. Already employers have begun to delay hiring and spending out of legitimate concern that Congress won’t get the job done, according to Business Week magazine. With Congressional job approval so low you can scrape it off the bottom of your shoe, no one’s betting that they’ll get it right or on time.
Right now, electoral politics has produced another stare-down. The president would extend the tax cuts, but not for the “rich” who pay about 40 percent of all income taxes. The Republicans want to extend them all.
Meanwhile, the stalemate stalls growth, increasing the likelihood that state revenues will come in below projections. The September forecast is the one to watch. It frames the final weeks of the campaigns season. At that point, expect gubernatorial and legislative candidates to focus on the coming budget shortfall, whether they want to or not.
In addition to slowing revenue growth, the next Legislature will have to wrestle with increased pressure to boost spending after years of budget discipline. Key legislators say they need to find a billion dollars to increase school spending in line with the state Supreme Court decision saying the state was not meeting its constitutional obligations. Both gubernatorial candidates want to boost funding for higher education.
Then there’s a new round of collective bargaining. The agreement, negotiated with Gov. Chris Gregoire, will be reached before the new legislators and governor take office. With the budget tight, unemployment high, and the private sector struggling, state workers should expect to pay more for their health care and to forego salary hikes. If past is prologue, they’ll resist.
The cure is economic growth. The best thing Congress and the White House can do for the states is to take responsibility and resolve the uncertainty.
Richard S. Davis is president of the Washington Research Council. His email address is rsdavis@simeonpartners.com.
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