Cutting State Spending Will Worsen CT’s Economy!

Leading economists indicate that cutting state spending now would have a negative impact on the economy.

• Joseph Stiglitz, the 2001 Nobel Prize in Economics recipient, and Peter Orzag, Senior Fellow at the Brookings Institution state, “Indeed, in the short run (which is the period of concern during a downturn), the adverse impact of a tax increase in the economy may, if anything, be smaller than the adverse impact of a spending reduction, because some of the tax increase would result in reduced saving rather than reduced consumption. The conclusion is that, if anything, tax increases on higher income families are the least damaging mechanism for closing state fiscal deficits in the short run.”

· This is due to the fact that spending cuts to programs that support low-income people will immediately reduce consumer spending. Because of CT’s high-cost of living, low-income people will have to reduce their spending immediately, whereas high-income people in most cases will not reduce their spending, but will utilize their savings.

• Professor Fred Carstensen at UCONN’s Center for Economic Analysis, as well as other leading economists, have stated that the economic recovery will be driven by household consumer consumption. Surveys of businesses indicate that due to large inventories and recent capital investments, businesses will not be making new investments until the recovery is already underway and consumer spending has improved.

· “A cut in state spending will deepen the slowdown as a result of the state’s not hiring workers (or even laying them off), not awarding contracts to private companies and postponing repairs of public properties,” wrote Farhad Rassekh, professor of economics at the University of Hartford, recently in the Hartford Courant.

· All economists agree that increased consumer spending is the only way we will turnaround the economy.

Leading economists believe CT’s economy will rebound by the 2^nd or 3^rd Quarter of 2002.

· Economists with the New England Economic Project say that New England is on stronger footing than a decade ago because of a stable banking system, a steady real estate market and economies that are more diversified.

· Edward Deak, head of the Economics Department at Fairfield University, anticipates the CT unemployment rate will peak at 5.4% next year and then gradually begin to drop.

· Three major economic conditions are in very good shape: interest rates are low and could go lower; energy prices are low; and inflation is low. All of these conditions create reasons for optimism.

There are six options for balancing the state budget. Used together, they will prevent devastating budget cuts that will only hurt low-income working families and their children, as well as worsen the economy:

1. Collect all that is due Connecticut from the Federal Government

· In recent years, the rationale for not seeking unclaimed federal reimbursements and new federal grants was the spending cap limitation. Now that we have a state budget deficit, the spending cap is not the issue. State agencies should seek all available federal funds before they are told to cut programs.

· The DSS report, Delivering and Financing Children’s Behavior Health Services in CT, states that CT can increase federal Medicaid reimbursements for children’s behavioral health services by at least $14 million.

2. Review tax expenditures (credits, exemptions, exclusions and deductions, costing up to $291 million in FY2002).

· Fairness and equity demand that this option be utilized to balance the state budget. The gap between rich and poor in the state, as well as the poverty rate, continued to grow in the 1990’s.

· Postponing the final phase out of the Estate & Inheritance Tax, which will only benefit the distant relatives, would save the state $30 million this year and $40 million next year. Postponing special corporate tax breaks could save $77 million this year and next year.

3. Enact targeted revenue increases, such as an increase in the cigarette tax.

· Increasing the tax on cigarettes from 50 cents to $1 a pack would generate $55 million in this fiscal year and would serve both a fiscal purpose and a public health purpose by discouraging consumption of a harmful product. New York, Rhode Island and Massachusetts have all hiked cigarette taxes beyond Connecticut's rate.

· Professor Fred Carstensen at UCONN’s Center for Economic Analysis, says that according to their analysis, the state could increase income taxes on higher income residents, lower the sales tax, and still see an increase in revenues to the state. This would also reduce the overall tax burden on individuals because they could deduct the state income tax from their federal income tax.

· A tax increase on higher income individuals is preferable to spending cuts to programs for low-income people because low-income people would have to reduce their spending immediately, whereas high-income people in most cases will not reduce their spending. All economists agree that increased consumer spending is the only way we will turnaround the economy.

4. Use Bonding for certain capital projects.

· Capital projects are a proven way to stimulate the economy. Surplus funds had been approved for school construction ($75 million in FY 02 and $50 million in FY 03), purchase of open space ($30 million) and other capital projects.

· Now that revenues have fallen and interest rates are low, it makes economic sense for the state to use bond funds to pay for capital projects.

5. “Spend it smarter” on programs that lead to cost-avoidance in the future.

· Some proposed budget cuts are “penny wise and pound foolish” because they lead to higher expenditures at a later time. For example, the Governor has proposed nearly $18 million in cuts to community-based mental health services for adults and children. These services will be much more cost-effective than our current practice of utilizing costly institutional care. In FY01, CT spent over $45 million on 450 children sent out of state for residential care and paid $27 million in re-insurance, essentially paid double, to cover the costs of Medicaid children who are “stuck” in in-patient settings because they could not be released due to the lack of adequate services in the community.

6. Use a Portion of the Budget Reserve (or “Rainy Day”) Fund.

· The fund was established for just this purpose. Leading economists believe CT’s economy will rebound by the 2^nd or 3^rd quarter of 2002. Revenue shortfalls should be constrained to this fiscal year. Using a portion of the Rainy Day fund will buy time until economic trends can be properly ascertained. This will prevent a needless and reckless slashing of the state budget.