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Budget crisis is a looking-glass war

Once we abandon fiscal Jabberwocky and return to the English language, however, the hysteria quickly disappear.

David G. Tuerck

Massachusetts is in the throes of what is widely described as a fiscal crisis. Four and a half months into fiscal year 2002, state officials are only now getting serious about hammering out a budget. And this progress, such as it is, represents a triumph of hysteria over logic.

The problem stems from the weakening economy and the resulting slowdown in tax revenues. For the last several years the state has increased spending at an annual rate of about 5% and succeeded in running huge surpluses in the process. This trend, continued into FY 2002, would put the state budget at $23.25 billion, approximately equal to the budget that the legislature was prepared to approve before the economic slowdown set in. Given current revenue expectations, there would be no surplus this time around. The state would run a deficit of about $1.37 billion.

This creates a dilemma: In the curious lexicon of government budget planners, a less-than-5% increase in spending over FY 2001 would represent a budget “cut.” Thus, if the FY 2002 budget were to come in at, say, $22.5 billion, thus trimming the deficit substantially, that would still be said to require a budget cut. And it would represent a budget cut, even though FY 2002 spending would end up exceeding FY 2001 spending by about $400 million.

This Alice-in-Wonderland language, according to which a “failure to increase spending” becomes a “cut in spending” breeds confusion and hysteria. Once we buy into the notion that rising budgets are really level budgets, the conclusion follows that level budgets are really declining budgets. When you factor in declining tax revenues, the conclusion also follows that it will be necessary to enact steep budget cuts in order to avoid ruinous deficits.

This strange rhetoric is the basis for the current budget hysteria. It explains why we hear dire warnings about multi-billion-dollar state budget deficits and the need for spending cuts on the order of $700 to $800 million, along, possibly with new taxes or the cancellation of tax cuts in progress.

Once we abandon fiscal Jabberwocky and return to the English language, however, the hysteria quickly disappears. The state has about $2.30 billion in its rainy-day fund and other reserves. Given these reserves and expected revenue collections, it can easily accommodate a $23.25 billion budget in FY 2002. If it is then willing to freeze spending at this level for FY 2003 and 2004, it can get through the current slowdown without depleting its reserves or risking insolvency.

With the economy on the mend by sometime in FY 2003, the state would be able, under this plan, to increase spending by 4% annually beginning FY 2005. When all was said and done, state spending would have risen slightly, in real inflation-adjusted dollars, over the period FY 2002-2006. Only the Mad Hatter could see a crisis in these numbers.

There is a crisis at foot here, but it has more to do with politics than with economics. Last year Massachusetts voters overwhelmingly approved a ballot measure under which state income tax rates are scheduled to fall from 5.6% this calendar year to 5.3% next year and then to 5.0% in 2003. Political leaders and commentators who opposed, or gave only grudging support to, this tax cut from the beginning are fanning the budget hysteria as an excuse for postponing its implementation.

Besides leaving the democratic process in shambles, postponing the tax cut would come at the worst possible time. It would increase the job losses already taking place as a result of the slowdown. At the Beacon Hill Institute, we figure that it would cost about 33,000 jobs. That's a heavy cost to bear, considering that the extra tax revenue brought in would come to less than 2% of expenditures.

As we have seen, however, there is no need to postpone the cut in the income tax, no need to impose new taxes, no need to use up tobacco settlement money and no need to enact any true budget cuts. All that is necessary is that we adopt a budget already 1/3 of the way toward being implemented and start figuring now how to live without automatic increases in the budget for the next couple of years.

Unfortunately for the Commonwealth and for her political future, Acting Governor Swift has allowed herself to engage in the same Jabberwocky that her opponent can be expected to use against her next year. Her response to the emerging deficit has been to go on record favoring huge budget and job cuts. She can, as a result, expect her opponent to attack her for championing last year's tax cut, which will be held up as being the principal villain of the piece.

Memo to Jane: Tell the legislature you've changed your mind. Tell them that you're ready to sign the budget they wanted anyway and that you're preparing a budget for FY 2003 that level-funds existing programs. Take credit for an administration that succeeded in cutting taxes while avoiding budget cuts, right through the state's worst economic crisis in ten years. That's the kind of leadership a great many of us have been waiting for you to provide, and this is your chance to provide it.

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David G. Tuerck is executive director, Beacon Hill Institute, and chairman and professor, Department of Economics, Suffolk University.

Thi s article appeared in the November 15, 2001 edition of the Boston Herald.

Format revised on 18 August, 2004