advisors expect a
major decline in state revenue
Economic & Financial Advisory Council is about to promulgate one
of the steepest downward revisions in the 30 years that it has
been forecasting state government revenue.
revenue committee will recommend that the full council lop
$125.9 million off the revenue estimate for the current fiscal
year which was made when the council last met in December. If
the new estimate holds up, the state would take in $38.4 million
less than the $3.29 billion received in fiscal 2007.
will be downsizing the fiscal 2009 estimate by $200.5 million
from the December projection to $3.25 billion. That indicates an
expected growth rate of 2.2% in the coming year. State law
requires the General Assembly to use 98% of that forecast as the
basis on which to craft the general fund budget.
That would indicate
a spending limit in the neighborhood of $3.19 billion. Governor
Ruth Ann Minner originally asked for a $3.41 billion budget.
The council will
issue its new forecast when it meets on Mar. 17. Usual practice
is to accept the revenue committee's recommendation. The council
will have three opportunities to make further revisions with
meetings scheduled for the middle of April, May and June. The
Assembly will enact budget legislation near the end of June.
Ken Lewis said he will make it a point to avoid using the R-word
when he presents the recommendation to the council and urged his
colleagues to exercise similar restraint and not refer to
recession during the discussion which will follow his
"It has become more
of a political term than an economic term," he said, adding that
he does not want to see a newspaper headline proclaiming that
the state's official economic advisors have declared the state
and national economies to be in recession.
"We have to give
very clear and careful explanations why we're doing what we're
doing," Lewis said, referring to its recommendation to
significantly revise the council's forecast. "I don't think we
should use charged language."
recession is defined as two consecutive
calendar quarters during which the U.S. gross domestic product
declines or -- to use trade jargon -- 'exhibits negative
growth'. Lewis, who is an economist, said it is the province of
the National Bureau of Economic Research to determine, after the
fact when all the data is in and necessary revisions are made,
if the country was in recession and for how long.
David Gregor, the
state Department of Finance's liaison with the advisory council,
said Global Insight, the Waltham, Mass.-based econometric
consulting firm the department uses as its economic data source,
currently is forecasting gross domestic product to be found in
negative territory during the first and second calendar quarters
of this year before reversing course -- primarily in response to
the economic stimulus package that Congress enacted -- in the
final two quarters of the year.
More to the point,
he said at the committee's meeting on Mar. 14, information
gathered from the state's revenue-generating departments appears
to clearly confirm the Global Insight conclusion. "We can call
it 'a colossal slowdown' or 'hitting the wall'. ... I don't care
what you want to call it. I'm going to tell what my figures are
showing. ... I'm looking at numbers that are consistent with the
[economic] forecasts we're getting," Gregor said.
He added, however,
that current thinking is to anticipate a "short and shallow"
recession. "It won't be as bad as 2001 or 1991," he said. But,
he added, there is "a 25% probability of a double dip"; that is,
another decline after a relatively brief period of recovery.
director J.J. Davis not only supported Gregor's view but also
said she believes current information points to state government
having to tighten its budget belt at least through fiscal 2010.
"We're going to do more cutting. This is not a one-time thing,"
Lewis said his
objection to referring to recession was not intended to imply
that the state's fiscal picture is rosy. "We obviously have a
problem here," he said.
component in the recommended revisions is proceeds from personal
income taxes. The council will be asked to take its December
projections down by $30.2 million this fiscal year and $44.5
million next year.
Gregor said there
was a sharp drop in the amount that employers withheld from
salaries and wages in the first two months of this calendar
year. Particularly hard-hit were the construction industry and
some service businesses. That indicates fewer people working and
those who are employed are working fewer hours.
committee will not recommend changing this year's estimated
revenue from the franchise tax paid by corporations and
limited-liability firms from what was forecast in December, but
will ask the council to reduce its fiscal 2009 estimate by
$28.5 million. The number of companies incorporated in Delaware
is expected to decline by about 3,000 to about 290,000 between
now and the end of this calendar year. There also will be little
incentive to expand assets, form new corporations or make
initial public offerings of stock during a slow economy.
taxes paid by companies actually doing business in Delaware also
are down significantly. The recommended downward revisions in
that component, which contributes a smaller portion of total
state revenue, are $35.8 million this year and $88 million next
year. Those numbers anticipate a decline in profits.
Proceeds from the
bank franchise tax would be reduced by $31.2 million this year
and $31.5 million next year.
In the midst of a
generally pessimistic discussion at the committee meeting, there
appeared to be a glimmer of a silver lining. Committee member
Andy Lubin said there is some evidence that the slump in the
real estate market is bottoming out. The inventory of houses
listed for sale has dropped a bit in New Castle and Kent
Counties while sellers are realizing, on average, about 95% of
the prices they are asking, he said.