Budget Restraint Creates Options
“My problem,” the notoriously reckless actor Errol Flynn was once reported to have quipped, “lies in reconciling my gross habits with my net income.” When it comes to state budgeting, too many governors and legislators across the country have indulged their own gross habits, such as buying votes with unfunded promises — and all without Flynn’s big smile or dashing style to hide their sins.
I’m pleased to report that in North Carolina, we’ve taken a decisive turn in favor of fiscal prudence. Since the General Assembly and Gov. Pat McCrory enacted their first joint budget in mid-2013, growth in General Fund spending has stayed within reasonable constraints of overall inflation and population growth. State policymakers have funded core responsibilities, enacted a series of growth-enhancing tax cuts, and built up North Carolina’s savings accounts to hedge against the risks of program overruns or recessionary deficits.
During these years, McCrory and legislative leaders were excoriated by liberal politicians, activists, and editorial boards. But their decisions were wise. Over time, their beneficial consequences have become increasingly evident.
Look at state government’s balance sheet, for example. In early 2013, North Carolina had just $419 million in its rainy-day fund. Today, that fund contains $1.1 billion, plus another $261 million in reserves set aside for Medicaid. That comes to about 6 percent of General Fund spending for the current fiscal year. In his new budget proposal, Gov. McCrory adds another $300 million to the rainy day fund and a (previously scheduled) $150 million to Medicaid reserves. That would give North Carolina a $1.8 billion fiscal cushion, which would exceed 8 percent of its annual budget.
Since mid-2013, the state’s economy has also staged an impressive recovery. Growth in gross domestic product, personal income, and employment has exceeded national and regional averages. The most release of federal data confirms the trend. North Carolina’s U-6 unemployment rate — which includes jobless people who’ve given up looking for work as well as part-timers who’d rather be working full-time — fell 4.6 percentage points from mid-2013 to the first quarter of 2016. That’s the largest labor-market improvement in the Southeast.
It would be an overstatement to credit North Carolina’s tax cuts and other fiscal policies for all of the state’s relative economic gains. But they certainly accommodated and probably accentuated those gains.
Whatever the cause, North Carolina’s healthy growth in personal income is the leading cause of the state’s robust growth in revenues. During the fiscal year to date, state tax collections are up 6.4 percent over last year while state spending is up only 1.1 percent. This is not a case of “tax cuts paying for themselves.” That rarely happens in the short run, particularly at the state level. But it is a case of solid revenue growth, combined with budgetary restraint and lower-than-expected enrollments for educational institutions and Medicaid, creating a sizable surplus in the 2015-16 budget and lots of fiscal room to maneuver in determining the 2016-17 budget.
Here’s how McCrory chose to maneuver. In addition to adding the aforementioned $450 million to savings and $155 million to repairs and renovations, the governor proposed $426 million in pay raises and bonuses for teachers and principals. Another $48 million in pay and $196 million in bonuses were directed to the employees of other state agencies and institutions. Overall, the governor’s budget would authorize a 2.8 percent increase in General Fund spending, roughly in line with inflation and population growth.
Legislative leaders may well apply different priorities — bringing the pay hikes for teachers and for other public employees closer into line, for example. Some senators believe the state should also enact additional income tax relief in 2016, by expanding the standard deduction to save taxpayers as much as $200 million annually, while keeping budget growth closer to 2 percent.
Whatever you think of the merits of their respective positions, keep in mind that the reason they’re having this conversation at all is that North Carolina’s economy is growing robustly and North Carolina’s state government is growing modestly. Fiscal conservatism gives leaders more options.
John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.