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The state deficit forecast: what's the real figure?

Why forecasters have so much trouble getting it right, and why the Washington deficit for the next biennium is $2 billion less than the $5.1 billion normally cited.


Just days ago, the state’s chief economist, Arun Raha, sliced another $780 million from expected tax collections through June 30, 2013. The number includes $80 million from the current fiscal year, which has been in the red for months. The projected budget deficit for 2011-13 now swells to as much as $5.1 billion. The situation, while bad, is not that bad. The real figure is about $3 billion, as I'll explain below.

According to custom, the March forecast is the final piece of the fiscal puzzle to drop before legislators get serious about writing a budget. It supposedly marks an end to the uncertainty and speculation (and wheel-spinning) by giving lawmakers a clear idea of how much money they’ll have to work with in the coming budget cycle.

But it doesn’t. As Raha said in comments prefacing his March 17 forecast, “The economic outlook remains clouded with a great deal of uncertainty.”  It’s been cloudy for a while. Since lawmakers adopted the biennial budget two years ago, estimated collections have fallen nearly $2.5 billion.

Forecasting is the art of anticipation. Like skeet shooters, analysts track the target, lead it a bit, and squeeze the trigger. It’s all about recognizing the arc and aiming just ahead of it. Predictability is the key. Zigs and zags, spikes and dives, turn the sport into a game of chance. Hits are rare. Misses rule.

Across the country, missed revenue forecasts are the norm. A recent joint analysis by the Pew Center on the States and the Nelson A. Rockefeller Institute of Government found that “in 2009 fully 70 percent of all forecasts overestimated revenues by 5 percent or more…The median error was a 10.2 percent overestimate.” Despite significant improvement in 2010, the Pew-Rockefeller analysts say the long-term trend is “that overestimates have gotten larger during each of the past three economic downturns, and more states have made them.”

University of Tennessee economist William Fox, who participates in that state’s forecasting process, tells Pew-Rockefeller, “Whenever I testify on this topic, I say I’m going to be wrong. The only question is, how wrong am I going to be?”

Raha’s track record beats many of his peers, though that may be small consolation to frustrated budget writers. The certainty they’re looking for doesn’t exist in a dynamic economy and turbulent world.

Last week, he gave a 20 percent probability to the pessimistic forecast, 10 percent to the optimistic, and 70 percent to the baseline. Carefully, he cited “geopolitical developments” including oil price volatility heightened by unrest in the Middle East and North Africa and  the impacts of the earthquake and tsunami in Japan.

To these uncertainties, add the Pew-Rockefeller finding that the primary factor driving forecast errors is “the volatility of the revenues streams themselves.” The analysts point to reliance on income and capital-gains taxes, shifts in consumer spending, and the continuing restructuring of the nation’s industrial base.

While Washington doesn’t have the unstable income and capital-gains taxes, we’re not immune to the vagaries of consumer spending — more important here because of our consumption-based tax structure — and an evolving economy.

Even as personal income growth returned over the last year, consumer spending remained restrained as households paid down debt, built savings, and replenished retirement accounts. No one knows when or whether consumers will revert to past patterns. But it’s unlikely anytime soon. Surveys show consumer confidence has fallen again in recent weeks. Rising gas prices and high unemployment suggest continuing frugality.

Another example of the growing challenges facing forecasters came out last week as Raha noted a revenue department estimate that the continued increase in online sales escaping taxation total $740 million.

Lawmakers facing a multi-billion dollar shortfall will want to spend everything Raha has identified for them. They shouldn’t. Remember, he also said downside risks are twice as high as upside risks. Take that seriously and you leave a little extra in reserve.

Conservatively, the forecast numbers mean that balancing the budget will require about $3 billion in serious cutbacks. The widely cited $5.1 billion shortfall, routinely reported as fact by the media, is inflated by about $2 billion for programs not currently funded and which no one ever expected to see in 2011-2013.


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Comments:

Posted Mon, Mar 21, 6:23 a.m. Inappropriate

This is a one-sided piece. I could talk about budget deficits all day long. I could spend more money than last year and experience budget deficits; I could spend the same as last year and experience deficits. The rate of revenue growth could merely SLOW and deficits could result. Costs could rise faster than revenue, and a deficit would result. As long as the author talks about deficits, its about the gap between expected spending and available revenue. That does not mean Revenue has declined in aggregate as much as implied, nor much at all!. The author has actually said NOTHING that informs or clarifies the States fiscal position. Nada.

Posted Mon, Mar 21, 9:17 a.m. Inappropriate

Yes, but there remains the need to address the huge "tax expenditures"--loopholes benefiting favored companies and sectors---which cut a huge hole in the state revenue base. Successive governors, Gregoire included, keep pledging to review and reduce them but, in the end, increase them. Time to get real.

Posted Mon, Mar 21, 10:12 a.m. Inappropriate

Good article that helps illustrate why those of us on the outside get frustrated when we hear politicians discussing budget deficits. There is the official deficit - a wink-and-a-nod number. It is comprised of all the things government has promised to do - all the programs in law plus a boatload of extra dollars to make up for programmatic and employee compensation cuts that have taken place during the current budget period.

But lawmakers know that the official number isn't the real number since they can't fund all the stuff included in the official number. So there is also a real deficit - a very different number based on the things the legislature has to fund plus the programs it really really wants to fund.

It's important for folks to understand why the state is on an unsustainable budget path. The official and real deficit numbers help explain one of the reasons. If the legislature simply repealed some of the laws they suspend during tough times, they wouldn't start each new budgeting period so far in the hole. But instead, they suspend the laws for two years, keeping them intact to virtually ensure a new deficit for the next budgeting cycle.

This suspension strategy helps keep various interest groups happy and it helps justify asking the voters for more resources. It also helps to keep some good but nonessential programs alive in case we want to fund them when revenues improve. But it also squeezes out other programs and justifies moving resources from the private to the public sector.

The notion of two different deficit numbers may be arguable but it is based in reality, Olympia-style. And, to the extent that's a problem, one solution comes to mind. Change the suspension strategy and reduce the deficit to something closer to its real number. Or keep pursuing the current strategy of maintaining unfundable programs on the books while telling the voters that the state's funding sky is falling, falling, falling. Maybe next time we'll believe you.

Posted Mon, Mar 21, 3:16 p.m. Inappropriate

Thanks Mr. Davis for a piece helpful to understand at least part of the predicament in the state's budget. I do disagree with crankyoldlady on a couple of her points. First, the "government" isn't responsible for reducing class sizes and providing COLAs to teachers; those were Initiatives to the people and they passed in 2000. To blame the legislators for them is unfair and to ask that they throw themselves on the sword of technical correctness is naive, given that voters would never raise their suspension strategy to a make or break issue at the polls.
Secondly, I would argue that Initiatives 728 and 732 are essential needs of the state and should be funded first not last. Reducing class sizes in the early grades will dramatically improve student outcomes and produce long-term cost savings for the state in terms of social services, health, and job prospects. Certainly far more important than incarcerating for life third-strike felons who boosted someone's TV.

bkochis

Posted Mon, Mar 21, 5:36 p.m. Inappropriate

You need to read http://cafr1.com and then rewrite your article. There is a video that is provided that was recorded last summer. This is one of the most important issues of the day, yet no one is writing about it and I wonder who is keeping them silent.
Walter Burien is very informed and is available for email questions as well as phone calls. You need to get up to speed why Michigan and the Commonwealth of Massachusets want to have the power to appoint a corporations over any states elected government at any level. They want to raid the second set of book with contain massive amount of money. Learn about it, and then write me and tell me if when you will write a accurate and more informative article. The press and journalists in America are just too afraid to tell the truth to the public. That is your job. The Federal law requires this money be reported in the Comprehensive Annual Financial Report but the local papers and television commercial news will not tell the public.
Do a Google search on Walter Burien and CAFR and you will find lots of You Tube videos, interview with Alex Jones.
Please please inform people.
Arizona now has a law pending in front of the Senate, HB (number I just lost when my tabs disappeared but I can find in an email I sent to another friend, or Walter Burien can get it for you, that will require more transparency in the reporting of the annual books. All States should have this law, and we are trying to get this accomplished, or will bloggers and writer still circumvent the real powerful information that we should never have to pay taxes again. It is the people's money.
Would appreciate a response.
Still not fully confident of this email system so will send separate email when I find the Arizona HB I referenced here.
Please let me know what you learned, if you wouldn't mind.

Posted Mon, Mar 21, 10:27 p.m. Inappropriate

bkochis,
I think the COL's point was that when the general rule is to cry wolf, the voters decide not to take it seriously and vote their own desires—sometimes it's smaller classrooms and sometimes it's no new taxes (what the Gov keeps saying she heard).

afreeman

Posted Tue, Mar 22, 10:08 p.m. Inappropriate

Thanks, afreeman, I see the point, but I'm not sure not crying wolf will get the voters to vote rationally for the common good any sooner (In general, I do not hold to the idea that "the people/the voters" are the innocent rational actors and the politicians are trying to fool them). Secondly, to kill these Initiatives will make it that much harder to ever get them funded. I would much rather have them suspended until better times and hope they can get funded than kill them outright and have to start the Initiative process all over again. In other words, I can live with some hypocrisy and foolery in politics as a way to keep the goals articulated and in the public spotlight.

bkochis

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