January 28, 2019 State House Update

After 10 years of a sustained recovery from the Great Recession of 2008-2009, there are economic warning signs that a slowdown is on the horizon. These storm clouds could bring challenges for Maryland’s economy and create headaches for the State’s budget planners. Some recent developments of note:

  • During a briefing in the Senate Budget and Taxation Committee, Moody’s Analytics warned that financial indicators point to an impending recession. A factor cited was that low unemployment could lead to rising wages and inflation. A recession is typically defined as a decline of gross domestic product for two or more consecutive quarters. The previous recession began in July 2008, making the current recovery one of the longest in U.S. history, which is also a harbinger for an economic slowdown.
  • The partial government shutdown caused economic hardship in Maryland due to its high number of federal government employees and dependent businesses. Comptroller Peter Franchot said recent revenue estimates show that Maryland has, so far, $57.5 million less in income tax revenue since the shutdown began. House Appropriations Committee Chair Maggie McIntosh further warned that the government shutdown costs Maryland up to $1.5 million in revenue daily. Policymakers must be keenly aware of the need to diversify Maryland’s economy and reduce its over-reliance on the federal government.
  • State budget analysts believe Maryland’s policymakers will soon be addressing structural deficits in future budgets despite enjoying a surplus in this year’s budget. A structural deficit occurs when spending exceeds revenues in the operating budget. Budget analysts also cautioned that an economic slowdown and political upheaval in Washington, D.C., like the recent prolonged partial government shutdown, could bring sustained economic and fiscal hardship to Maryland’s economy.
  • The Kirwan Commission, which is completing its work to improve Maryland’s public education system, is in the process of putting a cost on its recommendations. The costs are estimated at $4 billion per year of new spending if all recommendations are fully implemented. Even with a strong economy and growing tax revenues, the State of Maryland would be unable to pay for the implementation of Kirwan Commission recommendations without new funding sources.

All, however, is not doom and gloom. Maryland’s budget leaders have been briefed about economic slowdowns and understand that it is imperative that the State be on a solid fiscal footing. As an example, Governor Larry Hogan’s Fiscal Year 2020 budget proposes a significant increase to the State Reserve Fund, better known as the Rainy Day Fund, to $1.3 billion. This is an important acknowledgement that a probable economic downturn requires responsible budgeting. Whether a growing Rainy Day Fund and a firm understanding of economic storm clouds on the horizon is enough has yet to be determined. There are simply too many factors and unexpected events (such as a prolonged government shutdown affecting 800,000 federal employees) that make predictions difficult. That is why it is so important that policymakers see the big picture and alter their approach accordingly.

Read the January 28, 2019 State House Update.