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For
the fifth straight year, Chmura Economics and
Analytics, Virginia’s premier economic analysis
firm, has completed its annual Economic Forecast
for the Thomas Jefferson Institute for Public
Policy. (This annual report is available on our
website.)
The
outlook for our economy remains bright, although
the rate of growth is expected to slow somewhat
nationally. As in the past, Virginia’s economy
is expected to exceed the growth rate of the
national economy. And that means our state
government should continue to see healthy
surpluses this year and next--a point I shall
return to momentarily.
Virginia's
political and business leaders look forward to
Christine Chmura's annual divination of the
economic entrails to help predict how business and
government funding will fare in the year ahead.
She expects the growth rate to slow from 2004's
heady 4.4 percent growth rate to a more modest 3.4
percent in 2005.
While
spending increases are expected in software,
equipment and buildings, she projects that higher
interest rates and oil prices will dampen consumer
spending. The Federal Reserve is expected to raise
interest rates throughout 2005 and 2006, and oil
prices are not expected to drop dramatically.
The
volatility of the price of oil is the big question
mark sitting on the horizon. If oil prices
continue to hover where they are today, or
increase, then our economic growth might slow even
more. If the price decreases to what many think is
its more normal $30-$35 a barrel, then our economy
could outperform this forecast.
Chmura
expects inflation to remain in check, with rates
of 2.9 percent in 2005 and 2.2 percent in 2006.
Low and stable inflation should help our economy
remain on track for reasonable and consistent
growth.
More
importantly, Virginia’s economy continues to
show healthy growth. Employment in the Old
Dominion increased 2.6 percent in 2004, compared
to only 1.8 percent nationally. Meanwhile, the
latest numbers show, Virginians' personal income
increased 3.3 percent compared to 2.4 percent for
the nation as a whole.
Northern
Virginia added the most jobs in 2004 – more than
60,000 – making it the second fastest growing
region in our state. Surprisingly, Blacksburg in
Southwestern Virginia sported the fastest growing
job increase, with a 9.7 percent gain last year.
Blacksburg is the home of Virginia Tech, a growing
research university that clearly is helping that
region.
The
only region losing jobs was Danville. Every other
major metropolitan area gained jobs last year.
This
year’s Economic Forecast, entitled “Aging
Demographic Shift Amid Economic Expansion,”
warns that the aging population nationally and in
Virginia brings serious challenges. Locally,
Virginia faces acute job shortages in certain
occupational categories that could choke growth in
some economic sectors. Government and business
need to address these shortages sooner rather than
later.
The
challenges of an aging society are, of course,
national in scope. The economists at Chmura
Economics and Analytics don't mince words:
"Changing demographics and increased life
expectancy puts the long-term solvency of the
Social Security system in jeopardy.” Changes
cannot be avoided, according to this Economic
Forecast, if the system is to remain economically
viable.
Now,
how does this expanding economy impact on our
state government? USA TODAY reported recently that
Virginia’s government is experiencing the third
highest increase in state income in the nation –
over a 14 percent increase in revenue over the
last fiscal year. And there is fully one
more year to go in the current two-year budget
cycle.
The
General Assembly spent more than $1.4 billion in
“surplus” earlier this year – money over and
beyond what was expected to come into the state
coffers after the tax increase. And there
are strong indications that an additional surplus
of at least that much will be facing the General
Assembly when it convenes next year following the
election of a new Governor and all 100 State
Delegates.
An
additional surplus of $1.4 billion is about $466
per family in Virginia. It would not be
unreasonable for the next Governor and General
Assembly to return to each Virginia family $250 or
$300 from this additional surplus. The remaining
surplus could be “set aside” for the Rainy Day
Fund and for one time expenditures for
infrastructure.
In
this way Virginians who pay these taxes will get a
“refund” for excess money flowing into the
Treasury that was not planned, the Rainy Day Fund
would be increased to help prepare for the next
recession and whatever is left over would be used
for one-time infrastructure expenditures and not
to grow the on-going base of government.
The
state budget is increasing beyond the rate of
inflation and population growth. Thus the burden
of government is growing on each of us. Despite
economic growth that consistently outstrips the
national average, the even higher rate of growth
in state spending will force another “budget
crisis” in four to five years--requiring tax
increases or “painful” budget cuts. A tax
refund next year would return the excess money to
those who pay these taxes and keep government from
growing too rapidly. Both are good for the
economy.
--
June 6, 2005
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