Two More Years of Fiscal Hardship

by James A. Bacon

The Commonwealth Institute has peered into Virginia’s fiscal future and doesn’t like what it sees. The state faces another $500 million budget gap next year, and a $300 million gap the year after that, meaning that the prospects of restoring cuts to education, health care and public safety are bleak.

Although tax revenues are recovering, they remain below pre-recession levels, write Sara Okos, Laura Goren, and Michael Cassidy in “In the Red: Early Warnings About Virginia’s Fiscal Outlook.(Click chart for more legible image.) Meanwhile, prolonged joblessness and poverty require more spending on social services such as food stamps, Medicaid and Temporary Assistance for Needy Families (TANF).

Not only is the economic recovery anemic, the state has significant obligations like replenishing the Rainy Day Fund, repaying the Virginia Retirement System funds it borrowed, and repaying the federal government for unemployment-insurance money it borrowed. Also, funds from the federal stimulus package (the American Recovery and Reinvestment Act) will have expired. Write the authors:

Inadequate revenue growth, coupled with the loss of Recovery Act funds, and increasing other demands on state resources will likely place Virginia on red alert unless action is taken. This could hinder much-needed investments and innovation in public education, health care, public safety, and economic and workforce development.

I share the Commonwealth Institute that Virginia’s conviction that the fiscal situation looks dire, and I believe the think tank deserves credit for bringing the issue to the public’s attention in a more authoritative way than I have been able to do. However, I do take issue with conclusions it draws from its fiscal analysis.

The Institute contends that state and local spending cuts and accompanying layoff of 6,000 employees have “impeded” the economic recovery. Not so. Given the reality that state and local governments must balance their budgets, the only alternative to layoffs would have been increasing taxes. Higher taxes would have killed jobs. Moreover, higher taxes kill private-sector jobs, not public jobs. As some commentators on this blog need reminding, private-sector jobs are more valuable fiscally than public-sector jobs because private-sector employers pay taxes — property taxes, BPOL taxes and corporate income taxes — that governments do not. Offsetting the loss of private-sector jobs with public jobs is a sure-fire way to erode the tax base.

Likewise, the Institute argues that a “cuts-only approach” to balancing the budget will hurt economic recovery. Maybe, but it would hurt less than raising taxes a like amount. The fact is, Virginia is in a fiscal jam and there is no easy way out. Instead of adopting a strategy of spending more money to meet core responsibilities, we should prioritize spending on programs that offer the greatest economic, fiscal and social return on investment.

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6 responses to “Two More Years of Fiscal Hardship”

  1. Peter Galuszka Avatar
    Peter Galuszka

    Jim (if you wrote this)

    I am puzzled. Gov. McDonnell says we are in a budget surplus. Why the doom and gloom? Are you saying he’s a liar?


  2. larryg Avatar

    Sort of but I’d like to hear Groveton and TMT’s “take” on this. Is McDonnell a an unprincipled hypocritical smoke and mirrors politician or is he a true blue fiscal conservative?

    Sounds like Mr. Bacon has pushed the BS buzzer here… LORD! does that mean that McDonnell will end up a bigger feckless phonyl than Kaine?


  3. Darrell Avatar

    Ok, I’m a little off topic. Well maybe a lot. What’s up with that crazy fare structure that Metro has? I need a day pass for both bus and rail, but the only thing on their website is some smart card that costs more than what the rides are worth. Why can’t they offer a day fare good for both that is easily bought instead of some stupid card that you have to walk until you drop to find someone who sells it? I’m trying to be car free here and they ain’t helping.

    1. Groveton Avatar

      Nobody takes the Metro except tourists and government workers. Rent a car.

      Ooops … that was my inside voice talking, right?

  4. I have trouble trusting any non-tax-paying entity (i.e., a nonprofit) that calls government spending an “investment.” Virginia, like any other state, needs economic growth and more private sector jobs. Moreover, NoVA and Hampton Roads are likely to be hit by the coming federal cutback in defense spending, especially in the area of contracting.
    Having said this, I think the basic direction Virginia is heading makes more sense than those of several other states. We need to produce government services with less resources and fund what works not “investments” that may or may not pan out.

  5. Groveton Avatar

    I don’t know why this is so fascinating. There is a surplus this year. Sort of. I think it’s overstated but it’s probably still a surplus after peeling back the worst of the exaggerations.

    However, transient things can crate a surplus in one year. The next year the transient things disappear and there is a deficit.

    Nobody has to be lying. Managing poorly? Perhaps. Lying? Not necessarily.

    As for restoring the rainy day fund – oh hell no. You must be kidding me. Give those yuckapucks in Richmond a pile of money they don’t need? We must be out of our minds.

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