Biennial Budget

Maine’s current economic forecast should prompt substantial spending cuts

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The latest report from Maine’s Revenue Forecasting Committee (RFC), published earlier this month, revised its estimate of the state government’s General Fund revenues in FY21 (the fiscal year spanning July 2020 through June 2021) to a whopping 10.8% below last year’s figures. This represents a revenue shortfall of $524 million year-over-year. After accounting for about $100 million in savings leftover at the end of FY19, this shortfall becomes $422 million, or a little more than 10% of the state government’s yearly budget.

Mike Allen, Associate Commissioner for Tax Policy, delivered the August report after the Consensus Economic Forecasting Commission (CEFC) last month provided an overview to lawmakers on how much the pandemic and resulting economic shutdown has affected the economy. In that report, the CEFC estimated that total personal income over 2020 would slow to an annual growth rate of 3.9%, 0.2% lower than the February 2020 forecast. Personal income is estimated to decline by 1.2% over 2021. Devastatingly, CEFC projects that Mainers’ will lose 5% in wage and salary income just this year.

Indicating the immense hole in which many Maine businesses find themselves, the CEFC’s July report estimates that corporate profits will drop by 30% this year. This highlights a huge downward revision from the February report in which they predicted corporate profits would climb by over 3%.

The RFC’s August report further revised down the estimates of some state revenues. For instance, the Highway Fund is expected to fall $30.8 million short this fiscal year and $30.5 million short in the next budget, also known as the FY22/23 biennium.

Perhaps the most alarming portion of the RFC’s report is the loss of sales tax revenue via prepared meals and lodging. The committee estimates that: 

“approximately 60% of the $238 million reduction [in sales tax revenue] in FY21 is attributable to taxable prepared foods and lodging…Lodging sales are assumed to improve slowly over the remainder of CY20 and are not expected to generate the same level of tax revenue as [calendar year 2019] until [calendar year 2022].” 

This may be an omen of the extent of the damage done to Maine’s tourism industry from the pandemic and the drastic government-ordered economic shutdown which followed. The industry is linked to 1 in 6 Maine jobs and earned more than $6.2 billion over the course of 2018, contributing $2.6 billion in income to Maine households. If the effects of shutting down the economy reverberate throughout the tourism industry for at least two more years—as the RFC estimates—a full recovery could be farther out than currently understood.

While the RFC projects a substantial shortfall in this fiscal year, they estimate that General Fund revenues will grow in successive years: by 5.6% in FY22 and by 3.4% for FY23. This is among the reasons why, last week, Governor Mills ordered state agency heads to offer 10% in cuts to their budgets.

These cuts represent the bare minimum of effort required of the state government to tighten its belt in response to this largely-government-initiated economic crisis. Back in January 2019, when Governor Mills proposed her budget that offered to spend even more, Maine Policy was clear that if policymakers expected a recession (which many economists had predicted), the decision to spend almost all available revenue in an attempt to further grow government would be to the great detriment of Maine people

Maine Policy cited a stress-test report of the state budget published in October 2018, at the end of the LePage administration, which foretold that a moderate recession would require Budget Stabilization Fund (BSF), also known as the “Rainy Day Fund,” allocations of 10% of the total state budget, or 15% in the event of a severe recession. Nevertheless, lawmakers and the governor agreed to increase spending by 10% over the FY20/21 biennium. Currently, the state holds $256 million in the BSF, equivalent to about 6.4% of the annual budget.

While none could have predicted the advent of a global pandemic, many predicted a recession would begin in 2020. If Governor Mills had heeded the warnings of the 2018 stress test report, she would not have proposed spending almost all available revenue, swelling the budget by 10%. She might have attempted to shore up the state’s finances in order to avoid overextending the resources of Maine people in a time of struggle. Despite the recognition that this was a real possibility, one would not have known it by reading Mills’ proposed budget last January.

Here’s hoping the Mills administration and Maine’s bureaucracy gets serious about the need to get its fiscal situation in order. There might not be many other options while our state economy hobbles along.

About Nick Murray

Nick Murray, of Cornish, currently serves as Policy Analyst with Maine Policy Institute, writing, researching, and bringing Mainers together over the issues facing the state. Previously, he served as Outreach Coordinator, planning events to spread the word about Maine Policy's work to new audiences around Maine.

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