According to the latest estimate from fiscal analysts at the North Carolina General Assembly, our state government will take in about $6.2 billion more in General Fund revenue over the 2021-23 budget biennium than was originally projected last year.

That’s a huge number. It represents nearly a quarter of the entire General Fund budget for the current fiscal year. And it’s not even the full amount of funds available. As of April 30, there’s $8.2 billion in unspent and undesignated sitting in the General Fund.

Now that state legislators have returned to Raleigh for their 2022 short session, we are about to hear a spirited debate about how to spend the revenue bonanza. Democrats are insisting that the General Assembly fully fund a court-ordered settlement on education funding. Republicans are looking at infrastructure needs and tax relief. Both parties are telegraphing a desire to increase compensation for public employees.

I favor some of these ideas. But may I offer a few words of caution?

Our broader economy is in trouble. America’s real GDP shrank by an annualized rate of 1.4% during the first three months of this year. And in an attempt to bring down rampant inflation, the Federal Reserve is raising interest rates.

That’s the right response, to be sure, but everyone needs to be mindful of the probable tradeoffs. Eight of the past nine periods of monetary tightening by the Fed were followed by recessions. Although a “soft landing” is theoretically possible, then, there’s a very real possibility that the GDP will contract sometime over the next year. If the contraction happens in the second quarter, that would constitute a recession by the standard definition.

I know North Carolina’s economic fundamentals look pretty strong right now. Our labor markets improved markedly in April, with the headline unemployment rate falling to 3.4% (down from 5.1% a year ago) and our labor-force participation rate topping 60% for the first time since the onset of the COVID-19 pandemic. Other states in our region posted good jobs numbers last month, too (in fact, North Carolina’s unemployment rate is the highest in our neighborhood, though it’s low by historical standards).

Still, it doesn’t require Eeyore-level pessimism to worry about a possible recession and its effects on state revenues and expenditures. It only requires realism.

It also requires looking more closely at that surplus-revenue figure of $6.2 billion cited earlier. Most of it, $4.2 billion, is occurring during the first year of biennium, and involves one-time shifts in the timing of reported income. The pandemic produced some rather weird financial patterns in both the public and private sectors. It would be a mistake to assume these patterns will continue into future years.

If even a modest recession follows the Fed’s actions on interest rates, that will both reduce revenue collections and increase state expenditures on Medicaid and other forms of public assistance. The projected surplus would shrink. It might even become a deficit.

Thanks to years of conservative budgeting, North Carolina has accumulated a large rainy-day fund and other reserves. Unlike some states, we wouldn’t have to close a fiscal gap by raising taxes, canceling contracts, or laying off employees. Indeed, the state could actually play a countercyclical role by giving teachers and state employees a pay bump.

That argues for a balance between addressing immediate needs and hedging against future risks — which is precisely what I think House Speaker Tim Moore, Senate President Pro Tem Phil Berger, and other legislative leaders are likely to do during the short session.

They know that if a recession occurs, they can’t (and shouldn’t) rely on another round of massive federal borrowing to paper over state and local deficits. They also know that their steady and disciplined approach to state budgeting is a big reason why North Carolinians have become increasingly comfortable with GOP majorities in the General Assembly.

We should all hope the Fed can engineer a soft landing. But hoping is not governing.

John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history.