December
2010

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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12-23-10

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Does Indiana Have a Structural Budget Deficit?


Does Indiana have a structural budget deficit? In one sense, Indiana doesn't have a deficit at all. We interpret article 10, section 5, of our state constitution to mean that the state must have a balanced budget. State balances must be positive at the end of each fiscal year. This requirement is always met, one way or another.

When we say "deficit," maybe we mean that current revenues are not enough to cover current appropriations. Appropriations are the legal authority to spend for education, health care, public safety and other state functions. The General Assembly sets appropriations in the biennial budget. Appropriations for this biennium were based on projected revenues for fiscal years 2010 and 2011.

Because of the recession, revenues fell far short of the budget forecast. We've covered that shortfall by running down balances, using stimulus aid from the federal government and with spending cuts. State agencies were asked to spend less than their budgeted appropriations.

The revenues that we expect to receive fall short of the appropriations we meant to spend by about $1.5 billion in fiscal year 2011. That's one measure of the budget deficit.

But we hardly ever say just "deficit." Mostly we say "structural deficit." Maybe we do that because it sounds more important, like we're building a deficit monument on a deficit foundation.

In the public budgeting business there are two kinds of deficits: "cyclical" and "structural."

Recessions cause cyclical deficits. Revenues fall because incomes and sales drop; spending rises because more people receive entitlement benefits. When the economy recovers a cyclical deficit goes away. Revenues grow and benefit payments fall, so the budget is balanced again.

A structural deficit is one that continues, even after the economy recovers. The federal government's budget, for example, is both cyclical and structural. The deficit is huge because of the recession, but even with recovery a large deficit will remain. We haven't figured out how to pay for rising federal medical and retirement benefits over the long haul.

Indiana's deficit might be cyclical. Before the recession it was balanced. In fiscal years 2006, 2007 and 2008, revenues more than covered appropriations. The deficit appeared when the recession cut revenues. When the economy recovers, the deficit will get smaller. But will it disappear?

Here's a little experiment. Suppose for 2010 we take education appropriations per student, Medicaid appropriations per beneficiary and all other appropriations per person. That's a measure of the service level we provided ourselves in 2010. Now, let's increase these per-person spending amounts by estimated inflation each year, and let's multiply those figures by the projected number of students, beneficiaries and people. That tells us how much money we'll need in the future in order to provide 2010 services to more people at ever-higher prices.

Will revenues grow enough to meet these spending levels in the near future? The answer, according to the December 2010 revenue forecast, is no.

The forecast has revenues growing 3.5 percent in 2012 and 4.1 percent in 2013. This would be growth near the average for the mid-2000s expansion. But the recession has put revenues in a deep hole. We need revenues to accelerate in order to provide services at their 2010 levels. We can't get there if revenues grow only at normal rates.

Revenue growth of about 6 percent a year through 2015 would do the trick. That's high, but perhaps not outrageous. So far in fiscal 2011 revenues are up 6.8 percent over last year.

Growing that fast five years in a row, though, seems pretty unlikely, and our forecasters aren't predicting it. In that case deficits would persist after the economy recovers, because the recovery won't get us back to the old revenue growth path. Our current tax structure, applied to our new, smaller economy, can't support our accustomed level of state services. That's a structural deficit.

We've already gone some way toward closing this deficit. With the governor's budget cuts, we're spending a lot less than the budget appropriated. But spending in the 2012-13 biennium may have to be several hundred million dollars lower than it is now.

We've got a structural deficit. In the budget session in 2011 the General Assembly will make a structural adjustment.

 

 

Writer: Larry DeBoer
Editor: Olivia Maddox