North Carolina is about to enter its four straight fiscal year of state budget deficits. Politicians in Raleigh like to point their fingers out, and away from themselves, blaming an economic slowdown for the problem. Undeniably, the recent recession crimped revenues and boosted demand for some government services, such as Medicaid and community college training. But the primary culprits are those very politicians.
Today two economists – John Silvia of Wachovia and Harry Davis of Appalachian State – helped drive this point home by presenting economic data on the past year and coming years to a meeting of the North Carolina Bankers Association and North Carolina Citizens for Business and Industry. They expect the recovery, which began later in North Carolina than in the rest of the nation, and is weaker here, to continue through 2003 unless a long and bruising war with Iraq holds oil prices high and causes a double-dip recession. They also observe that the 2001-02 recession was comparatively mild, with consumer spending remaining healthy and unemployment rates soaring but remaining below the levels one often sees in recessions.
Yes, state revenues tanked for a year or two, and are unlikely to grow at the rapid, 7 to 8 percent a year average rates we saw in the late 1990s. That’s not because North Carolina is reliving the Great Depression. It’s because those late-1990s revenue spikes were atypical and unsustainable. They were based on capital gains realizations from a supercharged bull market.
Rather than treating these revenues as unique events and restraining annual budget growth closer to the rate of annual growth in population or economic capacity, our politicians and their advisors made the dangerous assumption that the supercharged trend would last. They shoehorned billions of dollars into the budget for new programs, ranging from teacher-pay increases and Medicaid expansions to a capital construction binge for local water and sewer projects, community colleges, and universities. At the same time, they partially rolled back the tax increases enacted in 1989-90 and 1991-92.
The result was a fiscal train wreck that began in 2000 when the stock market reached its peak, sputtered, and began to fall. Corporate income tax and capital gains revenues followed suit. But remember, this was a retreat from the very high levels of the late 1990s, not some kind of unprecedented economic implosion.
And it’s no longer defensible for our leaders to deny knowledge of how we got into this mess. If the North Carolina legislature is presented in FY 2003-04 with a $1.5 billion or so gap between expected revenues and spending requests, as is now being forecast, it will be mostly due to the legislature’s previous failure to pass a serious and balanced budget. During last year’s session, lawmakers, with Gov. Mike Easley’ signature, built a 2002-03 budget around more than $800 million in one-time revenues and fiscal gimmicks. Plus, they failed to enact deep and permanent savings in major spending areas, such as corporate subsidies and higher education, that would have provided substantial recurring savings in FY 2003-04.
The economic and fiscal realities of our state budget situation are clear. What isn’t yet clear is whether North Carolina’s political class has yet learned its lesson.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.