January 9, 2008

Purdue economist: Indiana not fiscally ready for recession

"In state government, you'd like to have at least 10 percent of your budget saved back to guard against unexpected shortfalls in revenue," said Larry DeBoer. "For Indiana that amount would be about $1.3 billion.

"The state has been trying to build up its savings account so that it is ready if another recession comes along, but savings are projected to be only 8.7 percent of the budget by mid-2009."

DeBoer said it is hard to predict when a recession might occur.

"The last recession ended in November 2001," DeBoer said. "If the current economic expansion lasts eight years like the expansion in the 1980s, the next recession would start in November 2009. If the expansion lasts 10 years like the 1990s expansion, the next recession would begin in November 2011."

The jump in the nation's unemployment rate to 5 percent in December is an ominous sign, DeBoer said. Economic growth has been slowed by a downturn in housing construction and sales, declining home values, and a lending industry shaken by sub-prime mortgage defaults.

"Could a recession come sooner rather than later? Indiana's December revenue forecast cut projected Indiana income growth for fiscal 2008 and 2009 from 4.5 percent to 3 percent per year," DeBoer said. "That reduced the revenue forecast by about $230 million. That's the sort of shortfall you'd like to cover with savings. Without savings, other steps must be taken."

One such step is Gov. Mitch Daniels' request that state agencies cut their spending below appropriations by 5 percent.

Other fiscal policy decisions could present a challenge.

"The state plans to reverse payment delays to local governments by mid-2009," DeBoer said. "This accounting trick allowed the state to postpone monthly school tuition aid and property tax replacement credit payments from one state fiscal year to the next. That helped balance the state budget in 1993 and from 2002 to 2003."

The state delayed more than $700 million in school tuition aid and property tax relief payments in 2002 and 2003, DeBoer said. All but $286 million has been reversed since then, with the state scheduled to reverse the remaining payment delays by 2009.

Should the nation plunge into a recession, Indiana's revenues would fall even more.

"In the end, shortfalls have to be made up from savings with accounting tricks like payment delays, with spending cuts or with tax increases," DeBoer said. "If savings aren't high enough and the payment delays aren't fully reversed, spending cuts or tax increases are more likely."

Hoosiers could feel the impact in many ways:

* Taxes - Proposals to reduce property taxes with higher sales and income taxes are made more difficult if revenues fall short.

* Government services - Public employees who leave their jobs might not be replaced. That might mean longer lines at government offices and extended waiting times for Hoosiers who contact agencies by phone or online.

* Employment - Budget cuts or tax hikes could have a ripple effect on employment in the private sector.

"There's a relationship between the nation's economy and the state budget," DeBoer said. "While Indiana's economy is not big enough to affect the national economy, there could be a negative influence on Indiana if the nation's economy turns sour.

"Indiana is in better shape now to handle a short recession than it was five years ago, but we're not ready for a recession yet. We're still short of fiscal health and that means a recession would present state officials with tough decisions."

For more information on the state economy, tax and fiscal issues, and an archive of DeBoer's "Capital Comments" columns, visit DeBoer's Indiana Local Government Information Web site at https://www.agecon.purdue.edu/crd/localgov/.

Writer: Steve Leer, (765) 494-8415, sleer@purdue.edu

Source: Larry DeBoer, (765) 494-4314, ldeboer@purdue.edu

Ag Communications: (765) 494-2722;
Beth Forbes, forbes@purdue.edu
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