Some good commentary from Citi to keep in mind as you see headlines about the massive slashing states will be forced to do this year to balance their budgets.
We have one important final note on the budget “crisis” discussions. In every recent year, the centre for Budget and Policy Priorities has predicted huge total state budget shortfalls, which then have to be reduced to zero over the course of the fiscal year by purportedly “draconian” budget cuts. For 2012, for example, the centre is projecting $134 billion in budget shortfalls, which have to be balanced by tax increases or spending cuts. Draconian, to be sure, right? Well, maybe not.
In the February 1 New York Post, New York State Governor Andrew Cuomo wrote an op-ed which explains why the state is starting the next fiscal year with a $10 billion projected budget shortfall.3 It would appear that the state will have to cut $10 billion in spending from current levels to achieve balance, right? Well, not exactly.
The states budget baseline assumes a 13% increase in spending for education and Medicaid, so any spending level below that is deemed a “cut.” One has to wonder how much the projected shortfalls in other states result from similar fiscal gimmickry. Under relatively similar logic, New York City has been running projected deficits for as many years back as we can recall. By the end of the year, the city has always been able to reduce the deficit to zero. Our main point is that, in many cases, projected budget shortfalls have been based on expectations of sharp increases in spending, not upon zero net change from current-year spending. So, closing “projected” budget gaps has often not been nearly as onerous as the number would suggest. This is not to suggest that cuts this year and next won’t be painful — they certainly will be. What we are suggesting, on the other hand, is that they will not lead to the local government credit disaster the naysayers have been suggesting, not by a long shot.