February 18, 2013

Budget projections too rosy, economists warn Team Malloy

Steven Lanza, economist, University of Connecticut
Peter Gioia, economist, Connecticut Business & Industry Association
Ben Barnes, Gov. Malloy budget director

Several Connecticut economists are throwing a wet blanket over Gov. Dannel P. Malloy's $43.8 billion budget, raising concerns that the two-year spending plan relies on an economic forecast that may be too optimistic.

Tax revenue estimates in Malloy's budget are based, in part, on the state adding 17,880 new jobs in fiscal 2014 and 37,750 new jobs in fiscal 2015, with the unemployment rate dropping to 6.7 percent.

But Connecticut has not added more than 30,000 jobs in any one year in over a decade. The last time was in 1997, when the state added 31,100 new jobs near the peak of the technology bubble, according to state Department of Labor data.

Malloy's budget also forecasts 4.9 percent and 7.2 percent growth in Connecticut personal income for fiscals 2014 and 2015.

A budget official says the forecast, which helps determine tax revenue estimates, is achievable, but some economists are raising red flags, wondering if the projections are more fantasy than reality.

"That second year looks a bit rosy from my perspective," said Peter Gioia, an economist for the Connecticut Business & Industry Association. "This budget is saying things will be better by this July and then happy days are here again next July."

University of Connecticut economist Steven Lanza expressed similar sentiments.

"The numbers are within the realm of possibility, but I'm not convinced they are particularly likely," Lanza said.

Forecasting is one of the trickiest parts of putting together a budget plan, particularly in times of so much economic uncertainty. But correctly predicting economic growth rates can ultimately make or break a budget.

The state, for example, is facing a $140 million deficit in its current fiscal year thanks in part to lower than expected tax revenue collections, according to Comptroller Kevin Lembo. Higher demand for the state's social service programs — particularly Medicaid — is also adding to the expense side of the ledger.

That red ink is in addition to the $365 million in budget cuts lawmakers were forced to make in December to battle the growing deficit.

Projected gains in employment and personal income are two key predictors of income and sales tax revenue, which make up a large portion of the state's revenue collections.

About 61 percent of the $20.1 billion in revenue projected in Malloy's budget for fiscal 2014 is from income and sales taxes, which are slated to bring in $8.95 billion and $4.11 billion respectively.

In fiscal 2015, projected income and sales tax revenue will account for 61.7 percent of the $20.9 billion budget, or $9.47 billion and $4.2 billion respectively.

Malloy's budget predicts overall tax revenues will grow by 3.3 percent and 4.3 percent over the next two fiscal years respectively.

Malloy budget director Ben Barnes said the revenue projections are informed by an economic forecast provided by New York's Moody's Analytics, which predicted in December that Connecticut would add 13,000 jobs in 2013 and 29,000 jobs in 2014.

The state was actually a bit more conservative in its predictions, Barnes said.

Still, Barnes admits budget forecasting is not an exact science and there are no guarantees the projections will pan out.

"It's a dicey business trying to predict the future," Barnes said. "I'm sensitive to the idea that we may be too rosy in the out year, but we have time to correct that."

Gioia, the CBIA economist, said for Malloy's budget projections to be right the U.S. economy will likely have to experience 3 percent to 4 percent annual growth in GDP over the next two years, but there is a lot of uncertainty over whether that is achievable.

The U.S. economy actually contracted by 0.1 percent in the fourth quarter of 2012, largely a result of reductions in federal defense spending.

Barnes said he is aware of the doom and gloom projections for the U.S. and Connecticut economy, but he thinks things are slowly improving and his budget projections reflect that.

Still there are a lot of risks out there.

Of particular concern to Barnes are the potential for further cuts in federal spending, which many of the state's top employers, particularly in the defense industry, depend on. If sequestration goes forward and the federal defense budget is slashed, it will have negative consequences on Connecticut's economy, and hit employers like Pratt & Whitney, Sikorsky, and Electric Boat.

Just last week United Technologies Corp., which is the parent to Pratt & Whitney and Sikorsky, announced plans to cut 3,000 jobs this year.

The threat of the expiring Bush tax cuts at the end of 2012 could also impact budget revenue projections for the next year or two, Barnes said.

That's because there were many companies that paid out special dividends before the end of 2012 so that investors could avoid potential higher tax rates.

That will likely boost tax revenues collected by the state in the current fiscal year, but it could also reduce revenue collections for the next fiscal year.

Gioia said uncertainty around federal health care reform and the state's own fiscal woes could stunt economic growth in Connecticut.

Other economic forecasts for the state show a mix of optimism and caution.

Economist Ed Deak, of the New England Economic Partnership, forecasted in December modest growth in Connecticut over the next few years with job gains of 5,600 and 22,300 in 2013 and 2014.

After that, job growth in the state should rise steadily, Deak predicts, with the unemployment rate falling to 6.3 percent in 2016.

Connecticut lost 117,500 jobs during the recession and has gained less than a third of them back since then, keeping the unemployment rate stubbornly high at 8.6 percent.

Meanwhile, Deak predicts per capita income in the state, which declined nearly 10 percent from its peak of $53,213 in 2008, will grow to $52,556 by the fourth quarter of this year and $58,594 by 2016.

Lanza, the UConn economist, said he doesn't expect job gains of over 30,000 in the state any time soon, but he is hopeful a slow but steady recovery will continue.

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