On Tuesday, the state’s budget writers held their annual hearing on the state’s economic outlook. Budget leaders from the Governor’s office, the House and the Senate met jointly to hear from officials and economists.
The striking thing about the conversation was the uncertainty. For the current fiscal year, the forecasters project slow growth. For the next fiscal year, FY14, they expect a modest acceleration, but with big asterisks as to global economic direction and the outcome of the federal budget fight. Federal fiscal policy affects the state directly through federal support as well as indirectly through the economy.
The key document in the hearing is the Department of Revenue’s briefing book. The DOR’s economic consultants offer estimates for revenue growth in Fiscal 2014 ranging between 3.2% and 4.5%. Their range for Fiscal 2013, now almost half complete, is narrower, from 1.6% to 1.8%. They all assume “a partial or temporary solution” to the “fiscal cliff” by the end of 2012.
As to volatile capital gains, DOR projects an acceleration in calendar 2012, a slow down in 2013 and an actual drop in 2014 in response to tax law changes. In the Commissioner’s testimony that accompanies the briefing book, DOR also notes the possibility that corporations may increase dividend and bonus payouts in advance of expected tax rate increases, in which case fiscal 2013 might look a little better than expected.
The Massachusetts Taxpayers Foundation, one of several outside commentators at the hearing, projects revenue growth of 3.9%, within the range offered by DOR economists. MTF emphasized the contrast between that growth rate and the growth rate coming out of previous recessions:
While 3.9 percent revenue growth in 2014 is nearly double the rate in fiscal 2013, it is well below the 5.8 percent average annual growth in total tax collections – excluding capital gains taxes – from fiscal 2003 to 2008 following the last recession and half the 8 percent average annual growth rate from 1990 to 2008.
The Beacon Hill Institute’s forecast is more pessimistic than the official projection as to Fiscal 2013 revenue and comes in at the low end of the range of DOR’s consultant projections for Fiscal 2014. Like MTF, but commenting on national economic growth, BHI contrasts current growth rates with historical growth rates:
From 1985 to 1989, GDP growth averaged 3.7% annually while from 1997 to 2001, annual growth averaged 4.5%. At best, the current growth rate is a mere 2.1% a year.
According to the State News, Alan Clayton-Matthews of Northeastern came in a little higher than the other forecasters for FY14, including expected one time revenues. But he has also emphasized the Commonwealth’s dependence on the global economy.
The bottom line is that we should expect a tight budget year. If and only if the federal government maintains support to the states, we may be able to roughly keep pace with inflation. Last year we put in place some tools to control overall health care cost growth, but it remains to be seen what the administration is willing to project for MassHealth costs in FY14. That is the next big state-level variable to nail down — health care accounts for over 1/3 of the state’s budget. We also need to assess the impact of the recent problems at the Department of Public Health.