Friday, June 19, 2009

Going back to the 2006-7 budget would be draconian

North Carolina, which was already in tough fiscal shape, has revised its revenue projection for the upcoming (2010-11) fiscal year downward. The state legislature is meeting to close the budget gap. The Governor and state Democrats are looking to raise taxes and other revenues by approximately $1 billion. Republicans counter that revenue increases are not needed because the projected amounts would only lower the budget to 2006-7 levels.
Without raising taxes the state could spend $19.1 billion next year, the same as in 2006-07... Claims of the necessity for "Draconian" cuts and massive tax increases were wildly exaggerated. Thoughtful prioritization of spending could have balanced the budget without the need for massive tax and fee increases.
Because the Republicans have raised the issue, it's useful to consider why cuts back to the 2006-7 budget would be "draconian."

By the time that the 2010-11 budget year begins, the population of North Carolina will have increased by about 6 percent beyond its 2006-7 level. Though we can't say for sure, it's also likely that prices will have increased by at least that amount (they're already 6 percent higher than they were in 2006). So, just to keep up with population growth and price inflation, the budget would need to increase by at least 12 percent.

Unfortunately, those are not the only drivers in the budget. Higher education spending is a significant share of the budget, and the college-age population is currently growing faster than the population as a whole. Another large chunk of the state budget goes to Medicaid. Because of the recession, the number of households that qualify for Medicaid is increasing. Also, medical costs are rising faster than other costs. Although the American Recovery and Reinvestment Act provides states with additional Medicaid funding, North Carolina's own costs are still going to increase.

Thus, once we adjust for changes from inflation, demographic change, and economic circumstances, the 2006-7 nominal budget falls roughly 1/6 short of state needs, assuming that the Republicans' choice of 2006-7 represents state needs.

As it is, the proposed $1 billion in additional revenues would only close about a third of this gap. Thus, even with a tax increase, spending will still need to be cut about 10 percent below what it would have been to keep pace with 2006-7 levels.

A 1/6 budget cut would be draconian, yet that's all the Republicans can offer.


Roch101 said...

An honest question: Must the budget grow in proportion to population? Isn't there some economy of scale? Some things I can think of where their costs probably hasn't incresed by 6% because the population grew by 6%:

- Roads an bridges
- Land and resource management
- Debt service
- Operation of the General Assembly and Executive branch

Do you see the point of my question?

Dave Ribar said...


It's a reasonable question. However, we also need to remember that there are diseconomies as well.

Also, the areas that you mentioned are very small parts of the budget. The big drivers are education and health care. See this report from the General Assembly's Fiscal Research Division. Education and health care, which make up roughly 3/4 of the state share of the budget, are population driven; we also know that their costs increase at least as fast as inflation. The next biggest category is justice & corrections, which also has a population component.

In fact, one of the areas that you mentioned--roads and bridges--isn't a part of the general appropriations budget but is budgeted separately.

Roch101 said...

OK, Thanks!