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Posted on May 28th, 2021 in Local Government Education

~by Dr. Larry DeBoer

 

 

 

On April 15, toward the end of the 2021 session of the Indiana General Assembly, the State Budget Committee heard the revised revenue forecast. It was $2.4 billion more than the initial forecast from December 16. That’s “billions,” with a “b”. It was a forecast for the ages.

Why did it happen, and what does it mean?

2021 was a budget year for the General Assembly. The constitution requires that the legislature come up with a budget for state spending for the next two fiscal years. That’s fiscal year 2022, starting on July 1, and fiscal year 2023, starting on July 1, 2022, and ending June 30, 2023.

A budget is a plan, to set state spending as far out as 26 months from the day it passes.  Legislators don’t know what revenues will be over the next two-plus years, so they need a guess.  That guess is the revenue forecast.

The guess is done twice. There’s a forecast in December, at the start of budget debate. Then there’s revision in April, so the most recent information can be used to set the final budget numbers.

Each forecast is done in two stages. The state hires an economic consultant, IHS Markitt, to do a forecast of the U.S. and Indiana economies. They project Indiana income, home sales, and retail trade, and U.S. corporate profits, gasoline prices, stock values, dividends and a bunch of other indicators.

Meanwhile, the Revenue Forecast Committee comes up with equations that relate past revenues to past economic measures. It finds, for example, that a 10 percent rise in current Indiana income increases state income tax withholdings by about 9 percent. But a rise in the birth rate will reduce tax withholding growth, because new babies mean new deductions.

The committee runs the economic forecast numbers through the revenue equations, and the results are the revenue forecast for the coming biennium. The Revenue Forecast Committee is made up of staff from both parties, both houses, the State Budget Agency and some academic consultants. They agree on a consensus forecast. That’s so the General Assembly doesn’t have to spend time arguing over whose guess is right.

The forecast in December 2020 showed a 2.9 percent revenue drop in fiscal 2022, and a 3 percent revenue gain in fiscal 2023. So revenues in 2023 were not much different from what was expected in 2021. The forecast was greeted with a sigh of relief. Revenues had dropped off the table when the pandemic hit, but delayed income tax collections and a recovery in the third quarter made the revenue situation merely bad, not catastrophic.

Then Congress passed a big spending bill in December, and an even bigger bill in March. The vaccines rolled out faster than expected. States eased their pandemic restrictions. Consumer confidence improved.

Almost everyone’s economic forecast turned optimistic, including IHS Markitt’s. In December, Indiana income less entitlement payments had been forecast to grow 1.8 percent in fiscal 2022.  In April the forecast was 3.8 percent. For 2023, predicted income growth rose from 2.4 percent to 3.0 percent. The new forecast guessed that Indiana residents would see billions of dollars in additional income. Some of it would be paid to the state. The revenue forecast went up by $862 million for fiscal 2022 and $1.1 billion for 2023. There was even another $463 million expected for the rest of fiscal 2021. Added revenue totaled $2.4 billion.

How big is that number? The December to April revision back in 2019 was a $33 million decline. The biggest increase for the last 10 budgets was $762 million in 2011. The increase this year was more than three times as big.

If saying “yes” is more fun than saying “no,” the General Assembly had some good times after April 15. Before the forecast revision, the House passed a general fund budget that spent $36.3 billion over two years. After the revision, the final budget spends $37.4 billion. Legislators allocated an extra billion and change in the last week of the session. We’ll get a full accounting with the Budget Agency’s closeout in July.

It was a forecast for the ages. But a forecast is just a guess. Let’s hope this guess is right.

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