Bad economic news could confound state budget projections

Question Mark - wikipediaFeb. 15, 2013

By John Seiler

Gov. Jerry Brown’s cheery announcements of the state’s budget health are guiding budget spending priorities. As he said in his State of the State address, “The message this year is clear: California has once again confounded our critics. We have wrought in just two years a solid and enduring budget. And, by God, we will persevere and keep it that way for years to come.”

He praised the Legislature for cutting spending and continued, “Then, the citizens of California, using their inherent political power under the Constitution, finished the task. They embraced the new taxes of Proposition 30 by a healthy margin of 55 percent to 44 percent.”

But what if the modest economic recovery in California and the rest of the United States turns sour? What if the tax increases themselves hurt the economy? Not just Proposition 30 and Proposition 39 (taxing out-of-state businesses), but the Obamacare, payroll tax and other federal tax increases?

We won’t have good numbers on these things for another month or so. But until then, there are warning signs that the second part of a “double-dip” recession may be flying overhead like that meteor that just hit Russia.

Internal emails from Wal-Mart executives described February sales as “a total disaster.” Reported Bloomberg:

“Wal-Mart Stores Inc. had the worst sales start to a month in seven years as payroll-tax increases hit shoppers already battling a slow economy, according to internal e-mails obtained by Bloomberg News.

“Wal-Mart and discounters such as Family Dollar Stores Inc. are bracing for a rise in the payroll tax to take a bigger bite from the paychecks of shoppers already dealing with elevated unemployment. The world’s largest retailer’s struggles come after executives expected a strong start to February because of the Super Bowl, milder weather and paycheck cycles, according to the minutes of a Feb. 1 officers meeting Bloomberg obtained.”

So, as we have repeatedly warned on, the higher taxes are taking a toll not just on the rich, but on everybody. Lower sales will mean lower sales taxes collected by the California government.

Global problems

According to new estimates, Europe’s economy shrank by 0.6 percent in the fourth quarter of 2012. And U.S. News & World Report wrote, “Japan’s economy shrank in the last three months of 2012, its third straight quarter of contraction… The 0.4 percent contraction in annualized terms in October-December was worse than expected.”

Those two reports come after the U.S. Commerce Department calculated that the U.S. economy shrank by 0.1 percent in the same period.

Manufacturing, the mainstay of an industrial economy, is stagnant. Reported the Financial Times:

“US industrial production shrank in January after the biggest back-to-back gain in three decades, while factory activity in the New York region unexpectedly expanded in February, in a mixed picture of the country’s manufacturing sector.

Output at factories, mines and utilities fell 0.1 per cent last month after a 0.4 per cent gain in December, figures from the Federal Reserve showed on Friday. While economists had expected a 0.3 per cent rise in January, revised data for November and December showed the biggest two-month gain since 1984.”

One seeming bright spot is that China’s economy grew 7.9 percent in the fourth quarter of 2012. But that still was below the tepid pace of 10.4 percent in 2010 and 9.3 percent in 2011. And China’s growth rate for 2012 was its slowest since 1999, during the Asian financial crisis.

For California governments at all levels the message is: Be more frugal then ever. The rosy scenario celebrated by Brown fades away once the rose-tinted glasses are removed.

If the double-dip recession hits, then the budget cutting has not ended, but is going to be deeper than ever. And businesses will flee even faster California’s high-tax climate for the refuge of low-tax states.

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