April
2011

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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04-28-11

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The Revenue Forecast and the State Budget


After years of gloom in the Indiana State House, this spring saw a ray of light. The April forecast increased revenue projections for the coming biennium budget. That's the first time this has happened since a tiny increase in April 2005. You can see the projections on the Indiana State Budget Agency's website, at http://www.in.gov/sba/2563.htm.

Everyone expected an upward revision. We knew that revenues were running ahead of the December forecast for the first nine months of fiscal 2011. We're up by $115 million. That's money in the bank - literally.

So (I figured), the revision would start from a higher 2011 level and increase 3.7 percent per year for 2012 and 2013. That was the average forecast increase for those years in the December forecast. The added revenue would total about $400 million for the three fiscal years.

Instead, the forecast added $762 million. The reason was a more optimistic forecast for the Indiana economy.

Indiana hires Global Insight to do its economic forecasting. In April, Global Insight projected that Indiana income will grow 12.9 percent from fiscal years 2010 to 2013. Back in December, it projected a growth of only 10.8 percent. Global Insight thinks the Indiana unemployment rate will drop to 8.2 percent by 2013. The projection had been 9.2 percent. The company also has the stock market rising an extra 7.1 percent, and U.S. gross domestic product up by about 1 percent over December's projection.

All of these higher economic projections enter into the state's revenue formulas and increase revenue forecasts. More Indiana income growth means more consumer spending, which raises sales tax revenue. More income growth means more income tax revenue on wages and salaries. A lower unemployment rate should inspire more consumer confidence, which will increase spending and sales tax revenue some more. Higher GDP growth and a bigger rise in the stock market should increase income taxes on capital gains.

So, the forecast of sales tax revenue increased by $181 million in 2012, and by $172 million in 2013. The forecast of income tax revenue increased by $154 million in 2012 and by $155 million in 2013. That's $662 million right there. Add in the extra revenue for fiscal 2011, some slight adjustments in other taxes and a downward revision in riverboat revenue, and the total increase is $762 million.

What will we do with this money?

The governor immediately announced an added $150 million for K-12 education in the next biennium, partly to fund grants for all-day kindergarten. He also warned that the new revenues were "no reason to abandon caution." But any lobbyist worth his or her paycheck spent the last two weeks of April asking legislators for just a little piece of all that added money. The extra revenue also may smooth over some small differences between the House and Senate versions of the proposed budget.

The outlines of the next biennium budget are pretty clear. The improved revenue picture in 2011 will allow us to start fiscal 2012 with balances of about $800 million, which is 6 percent of the budget. That's higher than the rock-bottom minimum of 5 percent that Indiana has always managed to keep.

In 2012 the budget will be approximately balanced, with current revenues covering current appropriations. In 2013 the state will run a surplus, and this will allow balances to increase. By the end of the biennium in June 2013 we should have a billion dollars, between 7 and 8 percent of the budget, in the bank. Considering where we thought we'd be as of December - balances continuing near 5 percent for the whole biennium - that's an achievement.

Let's not get too giddy, though. The coming biennium will see the tightest budget in memory. Spending will increase by less than 2 percent per year, just enough to cover anticipated inflation.

Appropriations will actually fall. They'll be lower in 2013 than they were in 2009. Appropriations are the planned spending in the budget. In the last biennium revenues fell short of projections, so spending was cut well below the planned amounts. In effect, the new budget incorporates those spending cuts into the plan for the next biennium.

The budget will be tight. We're still in an economic hole. But the revenue forecast says that over the next two years, we'll start to climb out.  

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,