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Bad
Moody’s
Some say Virginia’s budget outlook
is improving. But with the state on the Moody’s
watch list, Gov. Warner should be applauded for his
fiscal caution.
Gov.
Mark R. Warner is drawing criticism from both
Republicans and Democrats for being overly cautious
in his projection of general fund revenues for the
rest of the current fiscal year. It’s a bum
rap.
Warner should be applauded for doing the right thing
regardless of the motivation imputed to him by his
critics. Much of the pain suffered in cutting the
state budget during the past two years was caused by
the assumption of a too-rosy economic scenario when
the 2000-2002 budget was approved. Once and for all,
we need to put an end to that indulgence.
It wasn’t the economic downturn that caused the pain. We
have learned from experience that the economy
doesn’t proceed in a constant upward direction. Every
decade, we can expect a slump.
Instead of being cautious in 2000, our elected leaders
authorized spending as if the economic good times
would roll on indefinitely. The last state
budget was hyper-inflated, making the budget
adjustment all the more painful when the economy
cooled off.
Because Virginia
depends heavily on income taxes to fund its general
fund budget, the effect of economic cycles is more
pronounced here than in a state that depends more
heavily on sales and other taxes. When the
economy is booming, as it was in the 1990s, Virginia’s
tax revenues increase dramatically. But when the
economy slumps, the drop-off in tax receipts is also
dramatic.
Warner is well aware that one of the nation’s credit
rating agencies, Moody’s Investors Service, has
put the Commonwealth on its watch list for possible
downgrading. One reason is that Virginia
drew down its Rainy Day Fund to close the budget
gap. Moody’s wants to see that fund replenished
before politicians fund new programs.
Restoring the Rainy Day Fund should be Virginia’s
highest priority. If the economy continues to grow
at the present rate, we may be able to do so without
cutting programs or raising taxes.
There is no guarantee, of course, that the present economic
recovery will continue through the next three
quarters — or even that it will be as robust as
Warner’s cautious forecast assumes. Economists
have been more wrong than right in their recent
projections. We have good reason to be cautious
now.
One way to choke the current recovery is to raise taxes, a
course that many states are now considering. A
wave of state tax hikes would cancel out the
positive effect of federal tax cuts. A better
approach for the states is to tighten their belts.
Warner projects general fund revenues to grow through next
spring at 4.6 percent.
According to a recent Wall Street Journal survey of
economic forecasters, the present rate of growth
will decline from 4.7 percent during this quarter to
4.0 percent in the fourth quarter and to 3.85
percent during the first half of 2004,
Warner soon will demonstrate whether his fiscal
conservatism is for real. He will present
details of his budget plan to one of the rating
agencies later this month and to the General
Assembly in his formal December budget proposal.
He has already announced he will propose the $525 million
additional school funding requested by the State
Board of Education last May. Restoring the
Rainy Day Fund will cost about the same. Under
the current revenue forecast, this leaves nothing
for the last phase of the car tax repeal or other
program initiatives Warner fancies. Something has to
give.
--
September
25,
2003
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