4 Options

by Charles Arlinghaus

Only 4 budget options: borrowing, begging, taxing, cutting

THE CURRENT election campaign for state of fices has focused on the extraordinarily difficult fiscal situation the state finds itself in. Balancing the state budget without another federal bailout seems nearly impossible at first glance. This year, no one will come to our rescue and allow us to put off difficult decisions, so we have three basic choices: raise taxes, cut spending or borrow the money.

Over the last two budget cycles, New Hampshire’s tax revenues have been flat. In the 2006-2007 biennium, tax and fee revenues for the general and education funds were $4.47 billion while the current 2010-2011 budget is projected to be $4.45 billion. Despite that tiny drop, spending increased at historically average rates, growing from $4.4 billion to $5.1 billion.

That gap and the projected deficit are the same problem.

My estimate of the starting gap between spending and revenue is $691 million. The gap still exists because instead of solving the problem and bringing taxes and spending into line with each other, we borrowed $156 million and used a $351 million federal bailout and other onetime revenues, like the sale of state property for $90 million.

Can we just grow our way out of the deficit? As everyone understands, economic growth helps our financial picture. If general revenues, aside from the ones that are fixed payments, were no longer flat, but grew at a historically reasonable rate of 3 percent per year, we would shrink the deficit by $166 million. Similarly, spending growth of the same 3 percent per year (a bit less than the growth over the last four years) would add $232 million to the shortfall.

My estimate of $691 million in the hole assumes no spending or revenue growth. So if we did have reasonable economic growth, even if we held spending to a zero increase for two straight years, a feat achieved only once in the entire post-World War II history of the state (Steve Merrill’s second term), the remaining hole would still be $525 million.

Elected officials and wouldbe elected officials should be asked about the four choices they have. First, will you borrow more money to pay operating expenses? In the last budget, we borrowed money to pay the state’s building aid program, and we borrowed from the future to pay for debt service.

Ask them if more borrowing is on the table, or if we can, as we should, dismiss it as a one-time bad idea.

The second option is to beg the federal government to borrow more money to send us another bailout. At this point, I don’t think anyone honestly believes another bailout dime is coming from a federal government one step removed from bankruptcy. So assume begging Washington is off the table.

That leaves us with taxes and spending. I think we all agree that whatever recovery we’re in is precarious. Taxes are essentially a price on economic activity. And while we all pay some price, few of us are prepared to raise the price of any economic activity right now. If your favorite official is unwilling to rule out raising the price of economic activity, ask which ones they are considering.

The final choice is spending cuts. At this point, every politician of any stripe is at least talking about cutting spending.

Of course, it being election season, my cuts are reasonable and prudent. Yours are the height of insanity.

Across the country, 37 states cut their spending in response to the decline in tax revenue.

New Hampshire was not among them. It is reasonable then to think we can make some of the tough decisions the other 37 have made.

One objection to cutting is that about 45 percent of general and education fund spending is some form of municipal or school aid. My deficit estimate includes about $120 million of municipal aid reductions that are scheduled to come back next year. When politicians say they won’t cut local aid, are they counting that $120 million? By the way, if those cuts were continued and we had the revenue, but no spending as we talked about above, then flat spending otherwise would leave us “only” $400 million short.

For those of you keeping score at home, $400 million is 8 percent of the total general and education fund spending in the last budget. If we cut every department and program by an average of 8 percent — some more, some less — the budget is balanced. If you won’t cut spending that much, you must either tax or borrow; those are the choices.

But now is the time to ask when politicians are listening to you, not the lobbyists. Will they borrow again? Will they raise taxes? Will they cut spending?

Or are they just hoping for the best?

. Charles M. Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a freemarket think tank in Concord.