November 21, 2012
As originally published in the New Hampshire Union Leader
Winning an election for governor is a sort of mixed blessing in New Hampshire. On the one hand you have the euphoria of having won the election. On the other hand, your gift is to immediately start preparing a budget that’s due just a few weeks after you get sworn in. New Hampshire’s budget is always in a bit of crisis and this year is no exception.
Every two years, we see headlines about difficult budget decisions. The last few cycles have been worse than most. After four years of recessionary revenue contraction, emergency budget fixes, and unusual financial measures (gimmicks if you didn’t like them, unusual measures if you did), the legislature had a huge problem. So the 2011-passed budget cut spending to bring revenue and spending back into line with each other.
The current governor-elect and many newly elected legislators spent a lot of time on the campaign trail promising to reverse those changes or at least ameliorate them. Now comes the hard part.
Budgets, like politics, are all about choices. There are five or ten things everyone would like to add in but only if the money is available. Therein lies the rub. A budget is about picking and choosing among competing priorities but spending no more than the money that is available.
After the last budget, spending and taxes are roughly in line but there are pressures that will make it difficult to keep them in line. Everything else being equal, the natural growth in revenues (most taxes will increase a little bit as the economy grows without any change in rates) will pay for the things we are currently doing plus the natural increase in costs associated with those programs – health insurance costs more, retirement costs continue to rise, staff salaries have automatic increases, most supplies cost more.
In other words, to add new programs or “restore funding” to this system or that, some other area of the budget must be cut. It seems unlikely that other areas will be cut. After all, the last legislature was the most eager to cut spending in the modern era. Cuts they left on the table are probably too controversial to pass muster with current lawmakers.
The other way to increase spending is to increase taxes. The problem is that most taxes are essentially a price on economic activity. Raise the price and you get less activity. In the current precarious economic climate there are few activities we would like less of.
In times of budget pressure, there is a temptation, to which both parties are susceptible, to let some degree of wishful thinking trump caution in the budget process. Temptation rarely takes the form of obvious gimmickry. Things like using borrowed money for operating expenses are now ridiculed enough to be politically impossible.
But the first cautious battle will be over revenue estimates. Traditionally, the House Ways & Means Committee and the governor will develop revenue estimates concurrently. Two years ago, a huge disagreement over those estimates was the central budget battle. The governor’s estimates were of the same wildly optimistic variety that had gotten us into trouble the previous two budget. If you guess high, you can spend the money, hope for the best, and patch the holes later.
The House estimates were about $200 million lower. At the time I said they were pessimistic but not overly so. The House lowered them again but the Senate wisely went along with the original House estimates. Twelve months later, there was no budget emergency but revenues had come in within one-tenth of 1% of the estimate. The second year of the budget is actually doing a little better but it’s still early.
Lawmakers need to estimate revenues cautiously. Underestimating a little creates a small cushion for contingencies. Overestimating creates a crisis. On top of that, so-called medicaid enhancement provides about 5% of our revenues and is subject to a lawsuit which looks like it could go either way.
Add this adds up and it seems unlikely that any new programs are going to be added to state law without a significant tax increase (which seems unlikely).
Agency heads submitted budgets asking for about a 19% increase in spending. Based on current revenue levels, that seems about 19% too high. In all likelihood, those wanting the restoration or expansion of their program will have to live with the status quo.