RALEIGH – If sometime over the weekend you were out and about and suddenly heard a big WHOOOSH, I can clear up the mystery for you.
It was the sound of a collective intake of breath by thousands of North Carolina politicians, lobbyists, and activists reading Gary Robertson’s latest Associated Press piece on the state budget. The state deficit estimates have exploded again – to $2.2 billion for the current fiscal year ending in June, $3.6 billion in FY 2009-10, and $3.1 billion in FY 2010-11.
Already disappointed with the size of the federal “bailout” of state governments, North Carolina’s political class is now starting to comprehend just how little Washington’s latest borrowing binge is going to help. If the budget deficit truly ends up at $3.6 billion next year, or about 16 percent of the projected General Fund, less than half of it ($1.7 billion) can be papered over by federal borrowing. The rest must be closed by budget savings or tax hikes. And they can’t just be one-time changes, because the deficit will be nearly as large in 2011-12, and presumably substantial even beyond that.
In previous fiscal crunches, lawmakers and governors have hemmed and hawed around for a couple of months, mouthing platitudes about efficiencies and redundancies, all the while planning to propose big increases in sales or income taxes “when all else fails.” This time around, I think that Gov. Beverly Perdue and legislative leaders really mean what they say. The likely economic and political blowback from any big tax package scares them. I don’t doubt that they might slip in a couple of excise-tax hikes, on cigarettes and alcohol, but such ill-advised tax policies would bring in only a small fraction of the necessary revenue.
Reality intrudes. State government is going to have to shrink. The state budget must contract by close to 10 percent. Some high-priority items, such as law enforcement and classroom instruction, won’t take so large a hit. Others will take far larger hits – and in some cases should be reduced by approximately 100 percent.
Some on the Left consider 8 to 10 percent reductions in state spending to be unconceivable. This reveals more about their own lack of perspective than it does about the fiscal realities of the moment. Over the past two decades, our state and local governments have taken on far more responsibilities than can be financed at current income and sales tax rates. There is essentially no political constituency, outside the ranks of special-interest lobbies and public employees, for big increases in those tax rates, given the precarious finances of so many private businesses and households.
In other words, there is no practical alternative to bringing state government’s costs into line with fiscal reality.
How can North Carolinians survive if their government ends up costing 90 percent of its previous total? Just ask the residents of South Carolina, Tennessee, Texas, and Florida. All of them live in places where the cost of state and local government is at least 10 percent lower than in North Carolina. Many of them are struggling in the current recession, of course. But so are many North Carolinians – and many New Yorkers and Californians, where government costs a great deal more than in the Tar Heel State.
The truth is that when times are good, state and local politicians will spend as much money as the tax system generates on operating costs, while incurring additional fiscal obligations for capital construction and state employee benefits without much concern for how they will eventually be financed. If North Carolina had raised taxes years ago to fund bigger government programs, as many of the same Left-wing commentators advocated back then, we’d be in at least as dire a fiscal situation today – because the spending baseline would be higher.
A return to fiscal conservatism – by households, businesses, and the governments they finance – is the only rational response to the present crisis. So take a few more deep breaths, ladies and gentlemen, and then go to it.
Hood is president of the John Locke Foundation