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Wednesday, January 19, 2011
N.M. Budget Will Follow Nation's
By Micha Gisser And Kenneth Brown
Retired economists
Gov. Susana Martinez has inherited a weak economy and a huge budget deficit hovering around $400 million. She's gotten lots of advice, some bad like raiding the permanent fund, and some obvious like eliminating the lavish subsidies bestowed on the Rail Runner, the Spaceport and the movie industry.
Some advice, like firing hundreds of state workers, is simply impractical in the short run.
The budget problem might not be as dire as we think.
New Mexico's tax revenues are highly correlated with national economic performance, so if the economy picks up sufficiently, tax revenues will rise. Much of New Mexico's income comes from exports to the rest of the nation. So when a national recession strikes, New Mexico loses sales and therefore tax revenues decline. The state's high-spending Legislature bears some of the blame, but most of the revenue shortfall is traceable to the sick national economy.
Our analysis compares annual percentage change of New Mexico tax revenue to that of the national GDP, from fiscal 2000-2001 to 2009-2010. (Sources: Bureau of Economic Analysis and U.S. Census Bureau.) The data clearly show that the state tax revenue swings with the national economy.
Tax revenue declined significantly from $4 billion in 2000-2001 to $3.6 billion in 2002-2003 — reflecting the "high-tech" economic slowdown, resumed its previous level of $4 billion in 2003-2004 and then, following the Bush tax cut, increased nonstop to $5.6 billion in 2007-2008.
Between 2007-2008 and 2008-2009 state revenue swung sharply with the national economy, falling to $4.8 billion — a sharp decline of $0.8 billion. (Not counting the decline in revenue from severance, the net decline would be $0.5 billion.) The point we are making is that New Mexico tax revenue that fell by more than $0.5 billion during the recession might jump up by the same amount given a powerful recovery.
So when will the nation's economy perk up? In the wake of the recent federal tax compromise, many economists are now predicting a recovery in 2011. We agree, but with certain provisos. Congress must avoid tax increases and must cut spending. It should repeal and replace, or cut back ObamaCare, which is so disruptive that it will hold back macroeconomic performance.
Back to New Mexico: Some politicians have proposed tapping the permanent fund for whatever it takes to fill the budget gap. This is a poor idea.
Bleeding the fund would soon become a habit. As the value of the fund declined, so to would its earnings, which support education. Moreover, it would probably damage New Mexico's bond rating.
Other proposals would take so long to implement that they would be useless for the short run. One idea, for example, is to cut the state's workforce by several hundred jobs. Cutting the workforce is a good, if not novel, idea for the longer term, but not as a quick fix.
Let us begin with a long-run plan of state spending cuts. With the level of certainty that is likely to return to the both consumers and investors, national GDP would probably resume its robust growth rate of 2003-2007, and as our analysis shows, New Mexico tax revenue would follow with an upward swing of $0.5 billion — enough to plug the budget gap.
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