Slow and Steady Wins the Budget Race

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.

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5 responses to “Slow and Steady Wins the Budget Race”

  1. LarrytheG Avatar

    well that’s a different tune that we were hearing back in Feb… :

    ” TCJA Remains A Big Revenue Gain for State
    by Steve Haner

    Neither the House nor Senate Republican tax plan returns more than half of the TCJA windfall. The House GOP does propose to set aside another $517 million in the first year for some form of tax relief, to be determined later this year.”


    lots of “give it back NOW” – grinching as I recall…

  2. Well, Steve was right to point out that Virginia was the beneficiary of new revenue sources, including federal tax reform and the Internet sales tax. Northam didn’t mention either of those new revenue streams in his address to the money committees.

  3. LarrytheG Avatar

    re: ” “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.”

    Wow this IS scary! Jim B and I are totally on the same page but there is irony (once again) in that the TCJA tax cuts are being paid for by issuing debt – to the tune of a trillion dollars a year AND we may be headed for a recession in which those tax revenues will decrease even more and increase the deficit and debt even more .

    So yes, give Northam (and Mr. Lane) credit – the terrible leftists they are… they’re apparently … oh my GAWD …. “fiscal conservatives” – what they hey??? leftists who are “responsible”… never heard such a thing in my life! … I think I hear Haner clearing his throat and getting ready to hoot and bellow….

  4. Steve Haner Avatar
    Steve Haner

    Sorry, with all the MSM coverage of Northam and Layne I opted to write about the actual policy provisions on guns yesterday – especially the parts missed by the regular troops. Working on a tax conformity story with the new data… stand by. It’s interesting. More than half that “surplus” is really the windfall tax increase.

    Aubrey LAYNE, Larry. Aubrey thinks its me misspelling his name on BR, but its you :).

  5. LarrytheG Avatar

    Reading in WSJ this morning where Germany is selling 30-year bonds with negative interest – which means you get back less than what you proffered originally. The current interest rate for U.S. Treasury bonds is 1.57% which is going to actually INCRASE demand for them which, in turn, makes it cheaper and cheaper for the US to borrow money!

    PERVERSE! People say that Government is incompetent and can’t be trusted – until it comes to money, apparently.

    My apologies to Mr. Layne… I had copied his name from one of Steve’s prior posts… !!! so it’s still Steve’s fault……. 😉

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