Budget Assumptions Don't Hold Up

JULY 7, 2011

By JOHN SEILER

Not even a week old, the California budget Gov. Jerry Brown signed already is out of balance. “They did not cut as much as they needed to, and they pushed up revenue estimates,” Esmael Adibi told me; he’s director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis.

Adibi said that, according to Chapman’s economic forecast, released a month ago, the state can expect only $2 billion in additional revenue. But the Brown budget anticipates $4 billion.

So, it’s more of the old Capitol “smoke and mirrors” and “gimmicks” that the governor, in his inaugural address last January, promised he would disdain.

The budget does include “triggers” that supposedly would cut spending, should the rosy scenario on revenues pan out; but nobody knows how that would work in practice.

“The problem is coming up with $2 billion more,” Adibi warned. “How realistic that is, we will wait and see. My guess is that, come January, they’ll come up short. They did not really want to go through the hard choices. Their assumptions were too rosy.”

He added that some budget spending items also should go up, especially because of the cost of living, further tilting the budget into imbalance. The budget gap in 2012 then will be used as a reason for Brown and the Democrats, as well as their union bosses, to work for a tax increase expected to be on the November 2012 ballot. “They’re just trying to get that tax increase,” Adibi said.

Struggling Economy

Chapman University on Wednesday released its latest survey of purchasing managers in California. It is further proof that the booming economy on which Gov. Brown’s smoke-and-mirrors budget depends is unlikely.

The good news is that commodity price increases are easing from the tepid levels of recent years. “Commodity prices in general have been going down,” Raymond Sfeir told me; he’s a professor of economics and research fellow at the Anderson Center. “That’s the most important part. We expect it will continue into the third quarter. It’s not going to be as high as in previous quarters.”

Unfortunately, the rise in manufacturing growth the state enjoyed earlier this year is easing up. “We’re not as optimistic,” Sfeir said. “We will still be growing in California, but not as high as in previous quarters.”

In the next graph, below 50 means contraction, above it means expansion. We’re still above 50, at 56.2 for the Third Quarter of 2011. But that’s down from 60.7 from the Second Quarter, and is heading closer to the 50 break-even point.

That means that gas and food price increases should abate for a while.

He added that it’s “difficult to tell” how well the future will be. Some comments from the purchasing managers “weren’t anything negative. The whole economy may be doing the same.”

He said that the U.S. Federal Reserve Board’s QE2 — Quantitative Easing 2 — finished at the end of June. That means less money will be pumped into the economy. So there will be “decreasing Fed expenditures. Consumption is not growing as fast as it used to. There will be a slightly slower growth rate.”

Employment

Employment also is doing well, although not spectacular. The employment index dropped a little, from 58.9 in the Second Quarter of 2011 to 56.1 in the Third Quarter. But that’s still in positive territory (anything above 50). As recently as the Fourth Quarter of 2010, the index was at 49.9, dipping into negative territory.

 

High tech industries’ growth has slowed, a warning sign that the state needs to nurture them more. In the Second Quarter of 2011, high-tech industries’ index stood at a robust 62.9. But that slid to 58.5 in the Third Quarter.

Conclusion

The upshot of the numbers and graphs is that California’s economic growth is slowing. There is unlikely to be adequate revenue to pay for everything in the new budget. Hence, the “trigger” mechanism to cut funding likely will be pulled.

Instead of still trying to increase taxes, Gov. Jerry Brown and the Democratic Legislature should be relieved that they failed to do so in the current budget (except for the disputed Amazon tax).

Today, new federal jobs numbers indicate a mixed picture at the national level — another sign of the importance of not destroying jobs in California. CNBC reported that “the private sector added 157,000 jobs from May to June, well ahead of estimates though still not enough to make a meaningful cut into the unemployment rate, according to a report from ADP.”

As California legislators look toward their summer recess, they might usefully make plans to talk to not only their allies in the government unions, but local businesses and private-sector workers who pay the taxes for everything.

 

 

 

 

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