Don’t underestimate the power of government to recover

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Print this page by Bernie Niemeier

After cutting $4.6 billion from the state budget, the Virginia General Assembly may find a surplus in the state’s coffers this year.

Secretary of Finance Ric Brown says the state posted consecutive gains in tax collections in March and April, the first time that has happened in years. While May’s collections were down slightly from last year, they exceeded projections.  The state will enter its next fiscal year with a $130 million to $140 million surplus if June’s figures are flat compared to June 2009.

In final budget amendments passed last April, Gov. Bob McDonnell directed that any surplus first be used to give state employees a three percent salary bonus in December.  They have not had a pay increase in three years.
It was surprising to hear a surplus forecast less than six weeks after the budget passed. Nonetheless, I’ve been saying for some time that we should not underestimate the ability of government finances to improve.
Because of the Troubled Asset Relief Program (TARP), health-care reform and other recent changes, the federal government has been under siege for deficit spending. 

In fact, the national deficit as a percentage of gross domestic product (GDP) is at its highest level since post-World War II recovery incentives were put in place. This measurement gets a lot of attention among critics who say the government is “mortgaging our children’s future.”

In 1945, the federal deficit was 24.07 percent of GDP.  The budgeted deficit for 2010 currently equates to 10.64 percent of GDP.  Like other baby boomers, I’ve lived through the post-WWII recovery, and so far it’s been a pretty good run. I think the future from here might not be as gloomy as some predict.

In dealing with deficits, politicians are regularly elected into circumstances that they didn’t create, and the credit for any change usually goes to their successors, whether they deserve it or not.

In 1983, President Ronald Regan accumulated a deficit of 5.88 percent of GDP.  More than a decade later, during President Bill Clinton’s second term in office, the deficit was eliminated and the government produced a surplus equal to 2.37 percent of GDP.  These results are not exactly what I would have expected from either of these presidents.

In Virginia, there are no deficits because a balanced budget is constitutionally required.  This makes sense for the state. Unlike businesses, governments (at least in the U.S.) are rarely dissolved by market forces. (Well, maybe California?)
In recent times, budget woes of lesser proportions have been faced by Governors Wilder, Warner and Kaine.  Mark Warner, saddled with a heavy bill for car tax relief courtesy of his predecessor, Gov. Jim Gilmore, managed to produce a surplus though it took a tax increase to do so.

At the state level, the biggest driver of revenue is employment, which determines state income taxes.  At the county level, the revenue stream comes from real estate and personal property taxes.  All of these revenue sources can recover very quickly when economic tides are rising.

It is said that timing is everything.  Perhaps it isn’t at all about who is in office, but when they are in office.  At Virginia Business, we believe the state will be seeing better times sooner than some might think.

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