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March 2, 2015 Analysis

Malloy’s budget predicts moderate economic growth

Ben Barnes, Secretary, Office of Policy & Management

The Malloy administration faced many difficult decisions in putting together its two-year, $40 billion budget, but one of the most significant was predicting tax revenues.

Budgeting is never an exact science, and forecasting may be one of the trickiest parts of putting together a spending plan. Just ask Office of Policy & Management Secretary Ben Barnes, who had to do a mea culpa last week after it was discovered his budget inadvertently used incorrect personal income data to project the state's spending cap.

The mistake put Malloy's budget about $54 million over the state's statutory spending cap, an indication that even the slightest miscalculation can throw a budget out of whack.

So what's Team Malloy's economic outlook for Connecticut?

Tax revenue estimates in Malloy's budget are based, in part, on the state adding 21,300 new jobs in fiscal 2016 and 16,300 new jobs in fiscal 2017, with the unemployment rate dropping to 5.4 percent.

Malloy's budget also forecasts 3.9 percent and 4.9 percent growth in Connecticut personal income for fiscals 2016 and 2017. Overall, tax revenues are expected to increase 4 percent over the next two fiscal years.

Compared to Malloy's 2013 budget, which took criticism from some economists who said the economic projections in it were too rosy, the Democratic governor has gone with a more conservative outlook this time around.

For example, Malloy's employment growth projections are below the 23,000 and 19,000 new jobs forecasted in 2016 and 2017 by Connecticut economist Edwark Deak, who published in October an economic outlook for the New England Economic Partnership.

Last year, Connecticut added 26,700 new jobs, which was the highest growth in employment the state has seen since 1998. According to Malloy's budget, Connecticut won't experience as robust job growth over the next two fiscal years.

“We are being more conservative on tax collections and our economic projections,” said Barnes, Malloy's budget chief. “We are more guarded on what the upside is now.”

Barnes said the projections are informed by an economic forecast provided by IHS Global Inc., which is a different vendor than the state used previously.

In 2013, Malloy's budget was based on projections provided by Moody's Analytics, which took criticism from several economists because it projected 37,750 new jobs in fiscal 2015. Connecticut hasn't added more than 30,000 jobs in any one year since 1997, according to state Department of Labor data.

The Connecticut economists turned out to be right.

Malloy's fiscal 2015 budget has faced red ink with projected deficits reaching as high as $182.5 million, according to the Office of Fiscal Analysis. Malloy has been forced to make emergency spending cuts in recent months to make ends meet.

Barnes said many economists over-predicted economic growth rates from 2010 to today, but one of the key issues impacting the current fiscal year is the significant fall in oil prices, which few people predicated. That has negatively impacted the state's gasoline tax revenues.

One reason for the conservative outlook in the years ahead, Barnes said, is because of the economy's cyclical nature. The U.S. has a recession about every seven years, and if that trend holds true another downturn could hit in 2015 or 2016.

Short-term, Barnes said he expects job growth to remain strong, but it's harder to predict what will happen in two or three years.

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

About 78.2 percent of the $18 billion in net revenue projected in Malloy's budget for fiscal 2016 is from income and sales taxes, which are slated to bring in $9.8 billion and $4.3 billion respectively.

In fiscal 2017, projected income and sales tax revenues will account for 79.4 percent of the budget, or $10.3 billion and $4.4 billion respectively.

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