by James A. Bacon
Thanks in part to a $797 million surplus in last year’s budget, Virginia will build up its budget reserves to $1.6 billion by the end of the 2020 fiscal year, and Governor Ralph Northam is promising to take a “cautious and strategic” approach to the next biennial budget.
“During the next budget cycle we will continue laying a strong foundation for Virginia — preparing for a rainy day while investing responsibility in our long-term growth,” the governor said in an address to General Assembly budget committees.
Northam highlighted the $20 billion in economic development announcements made since he has taken office, more than any previous administration in a full four-year term. But looking ahead, he took note of increasing economic uncertainty heightened by the trade war with China. Speaking personally, he described how retaliatory tariffs could keep the soy beans grown on his family farm in the Eastern Shore “in the fields if we can’t sell them.”
Meanwhile, the state will face continued heavy spending pressure from Medicaid, K-12 education, and mental health. “Unless our trends change, I would think it would be a more conservative forecast going forward,” Secretary of Finance Aubrey Layne told the Richmond Times-Dispatch.
Bacon’s bottom line: I have criticized Northam for his leftist pivot on matters of race and education, but he does deserve credit for making cautious budget assumptions and building up reserves in anticipation of a possible economic downturn. The United States economy is in the advanced stages of one of the longest business cycles in its history, the global economy is slowing despite frantic efforts by foreign central banks to stimulate their domestic economies, and a decade of goosing growth by massive credit creation has created systemic (if often hidden) financial risk around the world.
I don’t pretend to know if another economic downturn is coming to the U.S. and Virginia. All I can do is point out the significant and growing risk that such a downturn might occur.
While Virginia lawmakers of both political parties are eager to spend every dollar they can lay their hands on, they should remember that it causes less political pain to not fund a program than to fund that program and then, when the economy goes south, claw back the funding. Volatile spending also promotesto inefficiency and waste.
Mark Crain, a former George Mason University professor, drove home that point in a 2003 book, “Volatile States.” He argued that swings in revenues and spending leads to the mis-allocation of public resources.
Budget volatility precludes efficient planning and adds significantly to the cost of government-provided services. Put differently, a reduction in spending volatility would be equivalent to a funding increase. The empirical evidence indicates that a 10 percent reduction in budget volatility generates efficiency gains comparable to a 3.5 percent increase in the level of funding.
Think of it this way. Budgeteers are optimistic and give program X a 5% budget increase. Program X administrators gear up by hiring staff, leasing office space, issuing contracts, and making other long-term commitments. Then the economy tanks and the budgeteers come back and say, OK, everybody has to cut spending 5% across the board. Unwinding those commitments is enormously expensive and inefficient. Program X ends up worse off than when it started.
“Slow and steady as she goes,” should be Virginia’s budgetary motto. Build your budget on cautious assumptions, accumulate reserves during good times, and maintain the ability to survive the next recession without subjecting core programs to debilitating volatility.
