Fiscal

Frivolous spending leaves Maine ill-equipped to weather economic slowdown

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Unnecessary spending in Governor Janet Mills’ biennial budget, approved by Maine lawmakers in 2019, is going to come back to bite the state now that economic activity has slowed significantly in the wake of the coronavirus pandemic.

Spending increases across departments within state government and $120 million to expand Medicaid to childless, able-bodied adults will prove to be too much as the state tries to meet its financial obligations in the coming months.

According to a recent analysis by Moody’s Analytics, Maine is going to find itself in quite the fiscal pinch as projected revenues fail to materialize due to the economic downturn caused by the virus. Governor Mills and her administration may be working to hash out a plan to reopen Maine’s economy, but it appears the damage has already been done during the public shutdown in the months of March and April.

In the analysis, Moody’s Analytics estimates the tax revenue shortfall states will experience, combined with increased Medicaid spending due to unemployment, to determine the “fiscal shock” caused by COVID-19. The analysis for Maine estimates the state will lose $756 million in tax revenues and increase Medicaid spending by nearly $109 million, combining for a total fiscal shock of about $865 million, an amount equivalent to about 10 percent of the state’s two-year budget.

This estimate is based on Moody’s “baseline scenario” which accounts for moderate stress to the economy where there is a deep recession in the first half of 2020 followed by a modest economic rebound, where travel and business restrictions are in place through the second quarter of 2020. Under this scenario, the peak jobless rate reaches 13 percent and the peak-to-trough real GDP declines 10 percent.

However, under a severe stress scenario where travel and business restrictions persist into the third quarter of 2020 and the peak jobless rate reaches 17 percent, Maine could experience an even greater shortfall. Moody’s estimates Maine loses $985 million in tax revenue and grows Medicaid spending by $125 million for a total fiscal shock of more than $1.1 billion under this scenario.

The report also finds that Maine and dozens of other states are not equipped to weather the economic downturn due to small balances in their rainy day accounts.

If these projections pan out, Maine will find itself in a situation where it is forced to cut planned spending or secure new revenue in the form of tax and fee increases to keep its budget balanced, as required by the Maine Constitution.

Governor Mills’ in her inaugural address acknowledged that Maine was closer to its next recession than its last, though the budget she proposed to lawmakers failed to respect this possibility.

Instead, lawmakers approved a $7.98 billion budget that grew state spending by approximately $800 million, just less than what Moody’s predicts the state will lose in revenue in its baseline scenario due to the coronavirus shutdown.

A 2019 analysis of the Mills budget proposal by Maine Policy Institute found it left little room to weather an economic slowdown.

“Governor Mills would be wise to spend less in her first biennial budget and create a larger buffer between projected revenues and her current budget proposal. A cushion of $383,355 and the $272.9 million in the Budget Stabilization Fund would not be nearly enough to cover the costs of this budget proposal in the event of an economic downturn,” the report reads.

Now Maine is in a position where this nightmare scenario is unfolding before us. If economic activity does not rebound to normal levels soon, the state could experience economic fallout far in excess of that experienced during the Great Recession.

About Jacob Posik

Jacob Posik, of Turner, is the director of communications at Maine Policy Institute and the editor of The Maine Wire. He formerly served as a policy analyst at Maine Policy. Posik can be reached at jposik@mainepolicy.org.

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