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November 25, 2024 Editor's Take

Bordonaro: Lawmakers must protect fiscal guardrails

By Greg Bordonaro

Connecticut received some positive economic news earlier this month when analysts projected a rosier outlook for state budget revenues in the next few years.

Greg Bordonaro

In their November consensus revenue forecast, the Office of Policy and Management and Office of Fiscal Analysis said they estimate the state will collect an additional $1.3 billion in tax revenues over the next two fiscal years compared to projections that were made in April.

That should be music to the ears of legislators, who will return to the state Capitol on Jan. 8 for the 2025 legislative session, during which they will debate and eventually vote on a new two-year budget for fiscal years 2026 and 2027.

However, lawmakers won’t be able to use all that extra money, thanks to fiscal guardrails that were enacted in 2017 that place annual restrictions on how much tax revenues lawmakers can spend.

Those guardrails, which include several types of restrictions, in recent years have helped the state regain budget stability, replenish its rainy day fund and pay down long-term pension liabilities.

That’s been a positive turnaround for a state that, in the wake of the 2008 financial crisis, faced a barrage of annual budget deficits that led to two major tax hikes and constant spending cuts — all of which contributed to a decade of little to no economic growth.

Nevertheless, those guardrails could be under threat, as some Democratic lawmakers, who control both the House and Senate by large majorities, have expressed a desire to loosen them in order to spend more money on government programs or constituencies.

That would be short-sighted. Lawmakers must protect the fiscal guardrails to ensure we don’t return to an era of fiscal instability, which had a detrimental impact on the economy and businesses’ willingness to invest in the state.

While Connecticut has enjoyed a positive economic recovery coming out of the pandemic, the state’s growth rate still lags the nation’s.

According to a recent report from the progressive Connecticut Voices for Children, Connecticut’s nominal GDP growth rate from the pandemic-induced recession through 2023 was 7.6 percentage points lower than the U.S.’ growth rate. That translates to an estimated $22 billion in total missed economic growth since 2019, if the state’s economic growth had kept pace with the U.S.’, according to Connecticut Voices.

We can’t afford self-imposed economic setbacks.

Easing the fiscal guardrails will send a negative signal to the business community, particularly since the state’s $23.4 billion annual budget relies heavily on volatile revenue streams — including income and business taxes — that are tied closely to the economy’s performance.

During economic slowdowns, those tax revenues shrink, leaving budget gaps that must be addressed through spending cuts or tax increases.

One of the guardrails, known as the volatility cap, requires lawmakers to save a portion of quarterly income and business tax receipts to prevent overspending and cushion the state from future downturns. In the current fiscal year, which began July 1, it’s estimated the cap will force lawmakers to save $1.4 billion.

In fiscal years 2026 and 2027, that savings is expected to total $2.5 billion, according to budget analysts.

It’s hard to deny the positive impact of the guardrails.

According to the CT Mirror, since the guardrails have been in place, the state has ended every fiscal year with a surplus, achieved several upgrades from Wall Street credit rating agencies, boosted its rainy day fund to a record $4.1 billion, and dedicated $8.5 billion in surpluses to pay down unfunded pension obligations.

It’s understandable some Democrats and other special interest groups — including public universities, hospitals, nonprofits, etc. — want to loosen the state’s purse strings to fund initiatives that arguably would have a positive impact.

But, if the state can’t maintain fiscal stability, those programs won’t be sustainable long term.

Instead, lawmakers must prioritize spending to ensure there is a safety net for those who need it, and that we make smart investments in areas that foster future economic growth.

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