Wednesday, February 06, 2013

Show me the revenue

Nothing wonkier than budgets I suppose.  So everyone I know is obsessed with parsing all the proposed expenditures in proposed 2013/2014 state budget just out. Makes sense; first question for everyone is how will this impact me? I'll pass on the initial summary that most expenditures are stable or modestly up, with no big losers. Overall proposed expenditures are going up +2.4% over the year before (i.e. the fiscal year we are currently a little more than halfway through).   

But what about revenues?  The general expenditure levels are first and foremost set by the anticipated revenues.  The battle for who gets what is really the second order battle after there is a projection (and it is just a projection at this point) of what revenues will be next year. Here are the revenues in the guv's budget (see bottom of page 23 of the budget in brief for summary).

So a few things. The budget just released is for the 2013/2014. What is being projected?  The +4.1% expected for the fiscal year we are currently in is being projected to scale way back down to just a +1.5% the next fiscal year.  Bad times ahead? A big deal?  Well, the state's total revenue or the general fund is a tad under $28.8 Billion this fiscal year.  So a difference of 1% is about $289 million.  Put another way, if revenue growth next year just equaled the growth anticipated for this year, there would be $750 million more top line revenue in the projection. Now it seems that expenditures are projected to grow +2.4% so someone is not quite as dismal as the revenue projection would have you believe, but still, it all starts with revenues.   
Why such a low revenue projection you ask?  My speculation on the dismal budget forecasting I went into in depth in this recent post: The most important number you have never heard of. In short, it's all about the projection for the state's labor force. Anticipate slow labor force growth and you get slow revenue projections. Might be an interesting question for econo-wonks to debate. Is revenue growth going to be as low as predicted? The answer drives a LOT of budget thinking. I'll just start you out, it turns out that Pennsylvania's labor force is growing pretty fast of late, no matter what the projection is calling for. 

But there is a 2nd question.   How about this years revenue forecast doing?  Forget the dire prediction for next year.  Was the projection for this year optimistic or pessimistic, we are more than halfway through the fiscal year so we should have a good feel for how we are doing.  +4.1% is certainly better than the year before.  So here is the same graph with the latest data through December (in red), so the first half of the fiscal year.  So not that far off,but if anything the budget revenues for THIS fiscal year are coming in ahead of the curve, by just a bit... but a bit that adds up.

See where this is going? Everyone fights over expenditures, but the battle is shaped by revenues. The budget just being proposed is anticipating just 1.5% additional revenues over the current fiscal year.  Virtually a new recession in Pennsylvaia. The current fiscal year is pacing at least +5% (or 3.5points above what is being projected).   Each of those percentage points in the delta is $280+ million not being budgeted for.  If nothing else, and I fully appreciate the obligatory dismalness of budget forecasters... at a certain point you have to ask yourself how much dismal is enough?  Maybe the bigger question is if there is reason to think Pennsylvania's ecconomy is going to tank pretty soon (FY13/14 starts in less than 5 months) then we should have some explanation as to why giove.


Anonymous Not Ken said...

I'll admit I'm not a wonk. But the revenue projection is a 1.5% increase off of what is running at +5% this year, correct. Could next year's projection then simply be that the Commonwealth has come off of the lows and is now looking at difficult steps to acheive similar growth going forward?

Wednesday, February 06, 2013 9:57:00 AM  
Anonymous BrianTH said...

We've sort of discussed these labor force projection questions in other contexts. It certainly is at least plausible that a significant portion of the current labor force increases are temporary, driven primarily by discouraged people re-entering the labor force as the labor market improves. It also is at least plausible that a significant portion of the current labor force increases are the result of factors leading to increased net in-migration (which again could be either more such people arriving or fewer leaving or both). In turn, it is plausible that either net in-migration will slow way down as economic conditions improve elsewhere, or that it will remain the same or even accelerate as more people elsewhere regain the ability to move. Since all these various scenarios are at least plausible, we are basically waiting to see what actually happens.

Personally, though, I'd bet on that 1.5% increase being overly pessimistic. I'd also bet on the next increase being substantially lower than the preliminary observation of 5%. For lack of a better methodology, I'll just split the difference and put the over/under at 3.25%.

But in any event, Chris's point remains valid: there is a wide range of plausible outcomes, and where exactly the actual outcome falls in that range is a high-stakes matter in the budgetary world.

Wednesday, February 06, 2013 12:45:00 PM  
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