Another Year, Another (Small) Budget Surplus


Overlooked in the frenzied weekend coverage of Governor Bob McDonnell’s “GiftGate” debacle: The Commonwealth of Virginia closed Fiscal 2013 with a $262 million budget surplus. State officials attributed the outcome to stronger-than-expected revenue growth of 5.3%, which surpassed the revised revenue forecast of 3.6%.

McDonnell credited “prudent fiscal management” and a reallocation of state funds to programs “that would produce economic growth.”

The surplus will yield nothing in the way of pork for General Assembly members to pass around. Surplus funds are already spoken for — the Rainy Day fund, the Water Quality Improvement Fund and the first permanent pay raise for state employees in six years.

Bacon’s bottom line: McDonnell deserves kudos for adopting conservative economic assumptions and sticking to them. However, a rhetorical tic appears in this press release, like so many other communications from the governor’s office, that really irritates me, and that is the implication that McDonnell’s economic policies somehow contributed to the commendable budgetary performance.

“Today’s great news is further proof that Virginia’s economy is getting stronger,” he stated. “Over the past three years, we’ve seen our state unemployment rate fall to the lowest unemployment rate in over four years. … We made tough decisions … and invested in areas that would produce economic growth.”

The fact is, Virginia unemployment has declined 2.1 percentage points since January 2010, when McDonnell took office, compared to 2.2 percentage points for the United States. In other words, Virginia’s improvement in the unemployment picture has slightly lagged the national average! I don’t see much room for bragging rights here. The fact is, Virginia’s economic performance is largely determined by national and industry-specific trends beyond any  governor’s influence.

Reinforcing the point, individual income tax revenues, accounting for 63% of General Fund revenues, fell $115 million below estimates. That’s hardly a sign of employment-driven prosperity. It was the boom in the “individual income tax non-withholding” revenue category — tied not to wage levels but to volatile financial markets — that accounted for the surplus. This revenue category zoomed $290 million ahead of projections.

And whom can we thank for that? None other than President Barack Obama, whose insistence upon increasing federal tax rates in 2013 prompted wealthy Americans to shift income from calendar 2013 to 2012. Virginia income tax receipts, like U.S. tax receipts, enjoyed a one-time bump. Tax avoidance, not economic growth, gets the credit.

Looking ahead. How will Virginia’s FY 2014 budget fare? We won’t get the tax avoidance bump this year. (Either will Uncle Sam, if that’s any consolation.) Also, the federal budget sequester, which has been slower than expected to make itself felt, could intensify.

In its 2013-2014 Virginia Economic Forecast conducted by Chmura Economics & Analytics, the Thomas Jefferson Institute for Public Policy notes that much of Virginia’s 2000s-era prosperity was due to the surge in federal spending. Federal contract awards increased 199% from 2001 to 2011, outpacing the growth in Gross State Product by almost four times. Conversely, sequestration-related cuts in federal spending, including furloughs of government employees, could crimp economic growth, the study warns.


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23 responses to “Another Year, Another (Small) Budget Surplus”

  1. Peter Galuszka Avatar
    Peter Galuszka

    Many states have had better budget situations. Guess the boomergeddon doom was wrong?

    1. How was the Boomergeddon thesis wrong?

      I totally nailed the situation regarding state/local budgets. In 2010 I wrote: “State and municipal governments, which constitute nine percent of the economy, will be another drag on economic recovery. … They are making painful cuts, laying off thousands of employees, tightening routine spending, and delaying capital construction projects. State and local governments will recover eventually — they always do. But in this economic cycle, it may take years to see a revival in revenues, and recovery will be slow.”

      I did predict that we could see state defaults by 2020. We’ll see what happens in the next recession.

  2. larryg Avatar

    “…. it is increasingly clear that American fiscal policy for the next few years is not the disaster zone that some commentary makes it out to be. The reasons are straightforward enough. The economy is gradually healing, leading to higher tax revenue and reducing social welfare spending. The deal to raise the debt ceiling in the summer of 2011 included spending cuts, including the sequestration policy that went into effect March 1. And the deal to resolve the fiscal cliff at the end of last year included tax increases. Put the three together, and you have a recipe for lower deficits over the coming years.”

    from: “The deficit is falling fast. Can Washington accept victory? ”

    Oh the OUTRAGE! we were PROMISED a BOOMERGEDDON! It was SUPPOSED to PROVE that Obama was a tax&spend disaster of a POTUS!

    this is not playing out according to expectations… for sure…

    GOOD GOD! If this keeps up, what the heck is the GOP actually going to run on?

    one small question for Va though. If we have a serious unfunded pension liability – why does it not get part of that surplus?

    Bacon IS CORRECT about one thing though – the inherent feckless nature of some politicians!!!

    1. We were promised a Boomergeddon…. in 2027. That was my SWAG prediction for Boomergeddon to occur. From what I can tell, we’re pretty much running right on schedule. We’ve got 14 more years for disaster to overtake us.

      I think you celebrate victory a little soon, there, LarryG. Five years into an economic recovery, made possible by unprecedented peace-time pump priming, has yielded a pretty pale prosperity. Perhaps you believe that Ben Bernanke has invented the monetary equivalent of a perpetual motion machine (creating economic growth by printing money), but I don’t. It’ll catch up with us sooner or later.

  3. larryg Avatar

    Oh I do not think we have “prosperity” by no means. We’re still hurting and it may not get much better if fundamental changes are underway due to globalization and light-speed advances in technology.

    but despite the weak recovery – the deficit IS shrinking a bit AND we ARE cutting spending – a bit…

    you are one brave soul guy to do predictions 14 years out! Even most famous economists won’t do that!

    but you know.. it’s the part where you and allied seem to be rooting for a disaster that mystifies. And we do know that austerity does not “work” … it leads to a downward spiral…because when the economy is weak – and you take money out of it – it gets even weaker!

    Bernanke was forced to that strategy because the GOP would do nothing to boost the economy – they were playing the “do nothing and let the POTUS twist in the wind” strategy… so the only thing left is to stutter: ” you just wait.. there WILL be a DISASTER dang it”.


  4. DJRippert Avatar

    Obama’s economic policies have been an abject failure. Obama wil run out of time in his second term before the economy returns to pre-recession strength. In other words, he inherited a recession but was unable to launch a recovery.

    Don’t believe me? Read the Huffington Post:

    The liberal Huffington Post can look for all the excuses they want. The simple fact is that today’s US economy is a mess and Obama has been in office for almost 5 years.

    Bacon’s Boomergeddon thesis remains correct. However, it will be a lack of employment rather than an avalanche of debt that sinks the country. Recent recessions have been “U shaped”. In the past recessions were “V shaped”. This recession may actually be “L shaped”.

    The basis for a large and healthy middle class in America was a persistent labor shortage across the skills spectrum. Recessions came and went. However, the recoveries entailed both increased investment and a substantial lack of available personnel. Hence, the “V shaped” recession and recovery from an employment perspective. Recent recoveries have the investment profile for a rapid recovery but lack the excess of demand vs supply of labor. Hence, the “U shaped recession” or even the “L shaped” recession from an employment perspective.

    As the structural rate of unemployment increases with every recession we face an unsustainable future. Right now, it appears that structural unemployment (even as measured with today’s squirrelly statistics) is around 7%. That’s 2% higher than the pre-Greenspan theory of 5% structural unemployment (the rate was falsely believed to be lower lower during Greenspan). My personal belief is that each new recession will add to the rate of structural unemployment. If the next recession adds another 3% and the one after that adds another 4% we’ll have a 14% level of structural unemployment. That’s Boomergeddon since our society is not designed to function with high rates of retirement and unemployment.

    Sorry guys but small surpluses in Virginia’s budget do not portend an end to our systematic economic problems.

  5. DJRippert Avatar

    As always, I’ll advise casting a wary eye toward The Imperial Clown Show in Richmond. Is the budget surplus real?

    “New accounting rules require that $15 billion in unfunded liabilities for the teachers’ retirement plan must be counted on the ledgers of local governments unless legislators volunteer to shoulder part of those obligations. That would be the fair thing to do, given the fact that the pension has been damaged by fickle legislators.”.

    Never trust the clown in Richmond. Never.

  6. larryg Avatar

    re: ” abject failure”

    the real question is what SHOULD he have done?

    the GOP had no answer and still don’t.

    when you cut taxes – you make the deficit worse unless you cut spending even more …. and when you do that – you cut entitlements (that spend money on food/shelter) and you cut govt employees ( who then also don’t spend money) and you drop into a liquidity trap.

    austerity does not work – we can see that now in the countries that took that path.

    The right thing to do was to borrow from the future and spend it now as stimulus for needed infrastructure projects …. to do the opposite of a liquidity trap.

    It was not Obama’s recession and Obama had zero help from the GOP in trying to deal with it.


    1. DJRippert Avatar

      What should be done is:

      1. Close loopholes in various government programs like the Farm Bill. Put the money into a national education fund.
      2. Encourage educational competition by funding charter schools and other, alternative education programs.
      3. Insist that all physically able young people contribute two years to government service after high school or college. This can be in the military, peace corps, disadvantaged education corps, etc. Use these two years to teach discipline and to improve basic skills in those young people where such skills need improvement (the ability to “read cursive” for example).
      4. State governments should relinquish power – especially the power to tax and spend – to localities. Localities are where jobs are created, not states. Let the localities try what they think best to create jobs.
      5. At the state level, develop top tier public universities in the population centers. Let UVA go private of they can afford to pay the state for the right to do so. Use the money at GMU, VCU and ODU.
      6. Eliminate corporate tax credits and loopholes at the federal, state and local level. Implement a simple, flat tax for corporations at lower rates than exist today. Today’s loopholes and credits benefit old, established industries at the expense of new, dynamic entrants.

      I am sure there is more to do. However, endlessly borrowing money from the future doesn’t fix anything. Neither does just lowering taxes and ending government programs. Both parties have their heads up their backsides.

      1. larryg Avatar

        I’d agree with most (not all) of these suggestions but there is no way in Hades that the GOP will pursue these.

        Anything that has anything to do with the govt doing it is verboten.

        Here’s the problems that need resolutions:

        1. – immigration

        2. – health care

        3. 21st century globally-competitive education

        4. the NSA

        5. setting a percentage of available revenues for DOD/NatDef spending
        and stick to it.

  7. larryg Avatar

    re: the clown show and unfunded pension fund liabilities

    this is not only a Virginia problem. It’s also not just a govt problem.

    for any defined-benefit pension or annuity – most took hits during the down economy and fell behind as a result – even happened to individuals with 401(k) of their own!

    there are two answers: 1. put more money into the plan now so later it generates the intended number or 2. wait and let the fund build further – i.e. delay retirement age….

    none of this was due to the “clown show”.

    and Va is not doing anything substantially different than other states with regard to the problem.

    but I’d rather see at least some of the surplus money go to help reduce the unfunded liabilities.

    1. DJRippert Avatar

      Reading … it’s not just for comic books anymore.

      “The current budget shows substantial improvement, with payments at more than two-thirds of recommended levels, but lawmakers continue to fudge. For example, they assume that investments will generate an 8 percent return even though VRS predicts only a 7 percent average return. Today’s rose-colored glasses will smudge up future budgets if the volatile market lets them down.”>

      What part of that paragraph can’t you understand?

      ” … but lawmakers continue to fudge.”

      See, the authors even left a summary!

  8. Peter Galuszka Avatar
    Peter Galuszka

    But Jim, you said it would take YEARS. It is taking only about two and a half (since your book came out).

    Look, when you promise us a solar eclipse. we want to see it.

    When you promise the comeuppance of our lives because of the free-spending, irresponsible LIBERALS, we want see it.

    Don’t promise what you can’t deliver.


    1. You and LarryG must carry some secret guilt complex about government spending…. I NEVER said that out-of-control government spending and deficits were all the fault of Democrats. I squarely laid the fault upon both parties. With the national debt at $17 trillion, all it takes is a strong uptick in interest rates and there is no way that either party, or both parties working together, could ever cut deeply enough to offset rising interest payments.

      1. larryg Avatar

        wait a minute. You NEVER said that the Dems and their policies were behind the deficits?

        If I go back in the archives.. I’ll not find a single instance?


  9. larryg Avatar

    things are going to hell in a handbasket for the “Dems are going to drive us to boomergeddon” crowd…

    their “we’ll show you how principled fiscal conservatism works” Governor has turned out to be Creigh Deeds twin on transportation and taxation as well as an unprincipled unethical sleaze.

    Got all these RPV folks up in arms about a guy named Dennis Martire said to be a Democrat and horrors AND a Union guy AND worse RIPPING OFF TAXPAYERS with taxpayer-funded trips overseas demanding that the GOP Gov do something to rid Virginia of this scummy scourge!

    and did you hear about the FARM BILL ? not a democrat voted for it. It’s P-O-R-K from one end to the other… talk about your crony capitalism and govt corporate welfare – GOOD LORD!

    remember – these are the VERY SAME GUYS who said that we were doomed because of Obama’s “failures”.

    The GOP – nationwide and in Va is a rolling train wreck…

    1. Larry, you’re the one who wants to turn every fiscal issue into a Ds vs. Rs blame fest, not me. We could quibble over which party is *more* to blame than the other, but that’s really a pointless exercise. Both are to blame, and neither has the will to make the necessary changes because (a) both parties answer to the American people, who want to have their cake and eat it, too, and (b) both parties truckle to special interests who keep the PAC money flowing.

      1. larryg Avatar

        hmmph… you don’t defend/support the GOP policies and condemn/oppose Dem policies?

        Some of your comments seem to come direct from FAUX news guy.

        the last one – the blame game on Bernanke…. clearly attacked politically from the right… and you join in… I think you’re fan dancing here guy.

        1. First, I don’t watch “FAUX” News, or FOX News. Ever. So, there is no credibility to the notion that my thinking comes from that source. I do my own thinking, thank you very much.

          Second, I do not blame Bernanke for the budget deficit. I blame him for loose monetary policy. Bernanke’s actions have been very beneficial to the deficit, actually. By driving down interest rates, he has reduced interest payments on the national debt by hundreds of billions of dollars per year! My concern is that Quantitative Easing cannot be long continued without creating some form of financial mayhem down the road.

  10. larryg Avatar

    there are two sides to what Bernanke is doing and more importantly WHY he did this as opposed to actions by Congress which would have preempted it.

    You may not listen to FAUX but FAUX carrying the message of the right which are found in many blogs and other media and you do parrot that message at times.

    you may not realize that you are doing it but the attack on Bernanke has come monolithically from the right – blogs and media and the very same blogs and media have advocated Congress doing NOTHING that would help improve the economy.

    can’t have it both ways!

    can’t blame Bernanke for doing a last ditch option that he would not have had to do – if Congress had been willing to do their duty but would not because it would “help” Obama.

    the attacks on Bernanke and his policies come from the right… blog and media.

  11. Peter Galuszka Avatar
    Peter Galuszka

    Fact checking Bacon is like frisking a seal!

  12. larryg Avatar

    I don’t go by R or D. I go by the narrative and who “owns” it.

    the “Bernanke is screwing up the economy” narrative comes from the right – media and blogs.

    the very same folks opposed Congress itself doing anything to help the economy except tax cuts – tax cuts they would not name but said the POTUS had to name.

    Bacon may not listen to FAUX news but he’s got the talking points down to the letter! Only the right is attacking Bernanke for the QE…

    the other side would have preferred something else other than QE but the opposition blocked all other options and would have this one if they could have.

  13. larryg Avatar

    I probably owe Jim an apology of sorts here. My bad Jim.

    I’m a fiscal conservative, socially progressive guy who does believe in the need and necessity of govt despite it’s terrible and at times gawd awful warts.

    I believe we are the greatest economy/country in the world because of the Govt the forefathers instituted – and yes – it was explicitly an one-man-one-vote majority-rule govt.

    I believe govt is neede not only to defend the country but to provide for the safety and welfare of it’s citizens and that means folks paying taxes to help the elderly, the weak and vulnerable and kids.

    I believe the govt should protect all property owners from bad guys, those who would pollute to enrich themselves….

    I believe the govt should treat public education the same way we treat infrastructure and commerce – a strategic imperative that is at the heart of our ability to compete with other nations and in turn keep our economy powerful – and in turn capable of paying the bills.

    and yes I do believe you need a central bank and monetary control policies performed by folk like Bernanke – and yes – there is a price to be paid for QE policies – downstream – just as there is a price to be paid for fiscal stimulus.

    What I do not care for is the current anti-govt, blame govt, demonize people (like Bernanke)…. i.e. let’s go back to libertarian every man for himself Neanderthal principles an start over.

    we were that way more than 200 years ago.. it was not nirvana.

    life is complicated for us as individuals. the lives of countries are a thousand fold more so but few of us would advocate killing ourselves because we are seriously flawed and folks, we don’t kill countries because they are flawed either.

    there are over 150 countries on the planet today that are the most free-market libertarian examples of govt on earth – low taxes, less govt, no entitlements, no Bernanke, puny transport infrastructure, minimal health care and public education.

    these countries – if you listen to the right and their allied faux libertarians will prosper and all the OECD countries are doomed to go bankrupt.

    this is the kind of off-the-rail thinking that now permeates our politics.

    do we have too much govt? YES!

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