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
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
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,