Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Indiana's Budget and the Next Recession

How big is Indiana's state budget deficit? It's hard to say. Indiana is required by its constitution to have a balanced budget. There can be no deficit in an accounting sense. That makes it hard to measure.

We can say that, in fiscal year 2005 (that's July 2004 to June 2005), Indiana's budget authorizes more spending than the state will collect in revenue -- about $600 million more. We'll spend $11.7 billion and collect only $11.1 billion. We'll avoid a deficit by drawing down balances saved from past years, by transferring money from other funds and by spending less than the budget authorizes. For the whole biennium, the deficit measured that way will be about $1 billion.

But that's looking backward. What is our future problem? Here's one way to measure it.

Indiana keeps balances in its checking and savings accounts. These help the state pay its bills on time. When a payment comes due before the quarterly income tax take arrives, the state can pay out of its balances. And balances help when recessions hit. The state can maintain services and avoid tax hikes by drawing on balances. 

The state budget agency has a rule of thumb about balances. It would like to see them at 10 to 12 percent of revenues. Right now, 10 percent is about $1.1 billion. By 2009, 10 percent is likely to be more, perhaps $1.3 billion.

Unfortunately, by mid-2005, balances will be about $337 million. To get to $1.3 billion, we'll have to collect almost a billion dollars more in revenue than we spend. That's tough, considering that in this biennium we'll spend almost a billion dollars more than we'll collect.

Another way of handling a recession is to use what probably should be called a "fiscal gimmick." The state pays billions of dollars a year to local governments for property tax relief and to schools in state aid. It pays monthly. The gimmick works because the state runs on a July-through-June fiscal year, while the local governments use a calendar year.

Suppose the state postpones the June aid payment to July. The locals get their full annual payment, though it costs them interest. But the state cuts its appropriations for the fiscal year. In fiscal 2002 and 2003, the state postponed a bit more than $700 million in local aid payments. That's $700 million in state service cuts or tax hikes that didn't have to happen.

In some future year this gimmick will need to be "reset." A July payment must be made in June. That will add $700 million to that year's spending.

Indiana would like to have balances equal to 10 percent of its budget, and its local aid payments reset. The former costs about a billion dollars and the latter $700 million. To be ready for the next recession, Indiana must collect about $1.7 billion more in revenue than it spends on state services.

No one knows when the next recession will start. In fact, some people will be astonished to hear that the recent recession ever ended. The National Bureau of Economic Research is our quasi-official arbiter of these things, and it says the recession ended in November 2001. The economy's been expanding for almost three years. Productivity advances and changing trade patterns have made for a slow recovery of jobs since 2001, especially in manufacturing.

Let's guess at a date. The expansion in the 1980s lasted almost eight years, and the expansion in the 1990s lasted 10 years. If this expansion is similar, the next recession will start between 2009 and 2011. 

The 2005 General Assembly will write a budget for the biennium ending in 2007. In 2007, it will write a budget to take us through June 30, 2009. If history is a guide, by then, a recession will be near.

That means over the next two biennia -- essentially the term of the governor we'll elect in November -- Indiana must find $1.7 billion dollars more than it spend on education, property tax relief, Medicaid and other state services.

How will we do that?




Writer: Larry DeBoer
Editor: Olivia Maddox