Ohio's Budget for Dummies....Part 2

In this edition of Budget for Dummies, Ohio’s Future Foundation will look at how politicians project state revenues, a critical component of determining the viability of the budget proposal under consideration, which increases government spending.

Making wild assumptions about revenues in making a budget is a dangerous move.  Think of how you would set your household budget two years out. Would you factor in a big bonus, even if you have not received a bonus in several years?  Would you increase household spending by buying a luxury car, even if you lost your job a few years ago and are not making as much as you used to? The answer to both those questions is probably no, but politicians always seem to be shouting ‘Yes!’ to both.

In state government, there are two primary ways you can pay for a project and keep the budget balanced: raise taxes (like if you got a pay raise) or cut spending to pay for more important projects (like cutting cable television to help pay the mortgage).  These two options are straightforward but come with a caveat: the state also makes revenue projections or assumptions about how much money the state will have deposited into the Treasury over the lifetime of its budget. This is where politicians can get into trouble.

Politicians forget that state revenues come from the wallets of hardworking people and often avoid coming face-to-face with the impacts of higher taxes and higher spending.  Moreover, when you are blind to the results, it is easy to continue inflating forecasts, so you can spend more. The future will be someone else’s problem – and projects that are popular with voters are the lifeblood of most elected officials – whether we can afford them or not.

Spending without being able to pay the bills has been a severe problem in Ohio over the past decade.  Under the leadership of Governor John Kasich, the state spent itself into a deep hole that we may not crawl out of for years to come.  In 2013, Kasich borrowed $1.5 billion for roads and bridges. Payments on that and other debt ballooned and now average $300 million annually.

Kasich knew he was spending money that he did not have.  Ohio’s Future Foundation is concerned that if the proposed budget moves forward that we might be making similar mistakes – spending more than we can afford – but for different reasons.

Today, the problem comes down to how revenue projects are done.  When governments make their estimates, there are two main factors considered.  The first is the economic health of the government (how steady a job do you have).

The second is revenue trends over time (does your pay increase every year consistently or are some years better than others).  Understanding these factors is a critical step in making a wholly good prediction for how much revenue (income) you will have. The problem is, it behooves the government to illustrate rosier projections that are economically feasible, as it gives them bargaining power with the legislature since they are “coming in with a higher offer” and because no governor wants his or her state to appear in dire straits under their watch.

The result is a budget proposal that does not accurately reflect the state’s ability to pay for significant increases in spending.  The Ohio House’s non-partisan analysts agree with Ohio’s Future Foundation’s analysis that if adopted, the state would be $700 million over budget.

The fact is, Ohio’s population is aging, and young people are moving away.  Presently, Ohio ranks as the 15th oldest state in the country and one of the slowest in population growth.  People are moving out of Ohio faster than 44 other states. Moreover, unemployment in Ohio still lags behind the national average.

These factors create economic uncertainty.  If our elected officials are going to ensure a sustainable and prosperous future for our state, it is best to temper expectations and takes our time before making significant increases to state spending that we may be unable to afford.

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