The last time the stock market plunged as drastically as it did last year was 2008. Afterward in 2009, federal income tax collections from non-withheld (non-wage) income, mostly investment income from the 2008 stock market, plummeted 31%.
After last year’s stock market plunge, Connecticut budget officials are forecasting only a 15% decline, according to the new Consensus Revenue Forecast.
If past is prologue Connecticut should experience at least a 30% decline. That would put tax revenue $1 billion below the just-released new Forecast, wiping out a large chunk of the newly projected $3.1 billion budget surplus for fiscal 2023.
Yet, no one will know until April, when almost half of all such revenue arrives, following good years in the stock market, bad years and flat years. In the months beforehand, little non-withheld income tax revenue is ever received.
Washington is now consumed by the question of whether to raise the ceiling on the national debt. That ceiling currently stands at $31.38 trillion, barely above the $31.34 trillion of outstanding debt subject to the ceiling, according to the latest Daily Treasury Statement.
The so-called responsible faction in the impending debt debate says that the ceiling should be raised without any risk of default. The nation’s creditworthiness, they argue, shouldn’t be held hostage by conditions of fiscal discipline. The White House falls into this faction, insisting on a higher ceiling without any strings attached.
A group of about 20 House Republicans—many of whom originally opposed Kevin McCarthy’s speakership—announced their opposition to raising the ceiling without spending cuts. On Bloomberg TV on Wednesday, Representative Andy Ogles of Tennessee said he was “unwilling to give Biden a blank check.” His emerging faction is being called irresponsible and worse.
But who’s really irresponsible? This small group of Republicans who want to reintroduce fiscal discipline or the Biden administration and congressional Democrats, who have been borrowing and spending like drunken sailors for two years. Since President Biden’s inauguration alone, the national debt has soared by over $3.6 trillion.
Was this spending responsible after $4.4 trillion that had already been borrowed and spent between February 2020 and January 2021 as part of a necessary and sufficient response to the pandemic and the ensuing economic shutdown? Many economists warned that Mr. Biden’s first spending initiative, the $1.9 trillion American Rescue Plan, was unnecessary and would unleash inflation—and it clearly has.
It’s hardly irresponsible to suggest that we return to fiscal sanity. Indeed, any increase in the debt ceiling should be matched by an equal reduction in this slew of post-pandemic domestic spending.
Yet the Biden administration’s irresponsibility in its domestic spending isn’t the primary reason it should be reversed.
Connecticut Governor Ned Lamont, a Democrat, talked pure Republicanism in his State of the State address last week, eloquently articulating fundamental GOP principles.
Talk is cheap. Will he walk the walk, and will he be able to bring Democrats along on the walk?
During last fall’s election campaign, Lamont took personal credit for turning a $4 billion deficit into a $4 billion surplus. In last week’s address he was humbler, crediting the turnaround to the bipartisan budget reforms of 2017 that were adopted even before he announced his first campaign for the Governor’s Mansion.
Not only did he credit the budget reforms, but he doubled down on them, saying “Connecticut’s permanent fiscal crisis is over. It’s over, as long as we maintain the same fiscal discipline that served us so well over the last four years.” Fiscal discipline is a Republican virtue. It means Connecticut's various caps on spending and on use of revenue are to remain in place.
Friday before Christmas, Congress passed a massive $1.7 trillion omnibus spending bill for fiscal 2023. Lost in the furious debate about the overspending involved was the fact that the $1.7 trillion entails only discretionary spending. There’s another $4 trillion-plus of annual spending, which is mandated by law. Social Security spending alone will exceed $1.3 trillion this fiscal year. Total annual federal spending in fiscal 2023 will far exceed $6 trillion.
The nation is spending well beyond its means. The nation ran a $1.4 trillion deficit in fiscal 2022, following a $2.8 trillion deficit in fiscal 2021 and a $3.1 trillion deficit in fiscal 2020. That’s $7.3 trillion in just three years. If, as many economists predict, we enter recession this year, the annual deficit will begin to rise again.
Deficits, of course, mean that we have to borrow to finance spending. Over the past three fiscal years, the national debt exploded from $17 trillion to over $24 trillion.
Few people noticed, because interest rates were near zero, so there was little cost to this borrowing. Once the Federal Reserve began hiking interest rates, everything changed.
For many Trump supporters, it was his policies that mattered. We suffered and endured his behavior, just as much as anyone else. Indeed, the headline in one Wall Street Journal oped read “The Only Good Thing About Donald Trump is All His Policies.”
Now, we can have his policies without his boorishness, and without the unfair vitriolic anti-Trump diatribes from the left, most of the media and from Republican Never-Trumpers. Trump inspired a whole cadre of impressive Republican presidential prospects, someone of whom is likely to carry the day in 2024 and carry his policies into the future, albeit with different possible successors having different notions of “all policies.”
Connecticut’s Office of Policy and Management (OPM) and its Office of Fiscal Analysis (OFA) both released fiscal accountability reports on November 18th forecasting annual fiscal surpluses through fiscal year 2026.
While these reports are legally mandated to be issued in November, they are exercises in virtual futility at this time of year, especially this year. Why? Because one of the largest sources of revenue and the largest category of expense involve significant unknowns even for the current fiscal year ending June 30, 2023.
Revenue from taxes on investment income is highly variable and unpredictable. Indeed, state law labels it officially as “volatile.”
Ned Lamont won a convincing victory in last week’s election. Congratulations are in order. Citizens should extend him the same honeymoon that his challenger would have enjoyed.
Yet, we must turn our attention to the future and the looming challenges we face.
First, the state is facing a serious decline in revenue.
Second, following on the heels of the costly recent SEBAC 2022 wage deal, state employee unions are going to come looking for improvements to the benefits side of their contract, which expires in 2027.
Labor always wants more, despite that Connecticut state employees already enjoy among the most generous benefits in the nation. Their health care benefits are the most generous in the nation by far. The negotiations are going to be tough and consequential.
Third, Eversource has warned that electric rates are going to increase 40%, which comes on top of the state’s already stratospheric energy costs. Likely, citizens and businesses will flee the state.
In most elections, an incumbent governor has an extensive record and a vision for the future. Not so in Connecticut’s gubernatorial contest, despite that Democrat Ned Lamont is campaigning as if he is the fiscal savior of the state. He is claiming to have turned a $4 billion deficit into a $4 billion surplus.
That would have happened even if the governor’s office had been vacant.
Lamont had nothing to do with the turnaround, which is temporary in any case.