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YOU DECIDE: How can the budget gap be closed?

July 24, 2009

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu


Dr. Mike Walden
Media representatives:For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.

Budgets are a financial tool to track flows of money - where the money comes from and where it goes. When I was a kid my mom made a budget using envelopes. Each envelope represented a spending item - groceries, mortgage payment, electricity, etc. - and cash would be put in the envelopes to meet the month's expenditures. Rarely did my mom move cash between envelopes.

The largest budget being discussed in North Carolina today is the state budget. As I write, our state leaders are still wrestling with the fundamentals of the budget, specifically how much money they will have to spend and where it will be spent.

The recession doesn't make this any easier. In May, our state had the seventh highest unemployment rate in the nation. North Carolina's economy has been battered by declines in manufacturing, construction and real estate. Consequently, tax revenues flowing to the state have declined. The gap between what the state planned to spend this year and the revenues available for spending is the 13th largest among the states on a relative basis.

Unlike the federal government, which can legally borrow money to continue operating, North Carolina is required to have a balanced budget. So the gap the state is facing for this budget year will have to be closed.

The multi-billion dollar question is, how will it be closed? There are really two possible answers: reduce planned spending or increase tax revenues. There are issues with each.

Working against spending reductions are three factors. Government costs tend to rise each year. More people typically depend on government during recessions. And every spending item in the state budget has avid supporters.

Spending rises each year because our state population is growing, and price inflation makes government services more expensive. The number of students in schools and colleges, the number of drivers on our highways and the number of folks needing medical assistance generally expand each year, pushing public budgets up. Many of these services - such as medical care - also cost more year after year. Therefore, just to provide the same level of service, state spending on many programs will be larger each successive year.

But isn't there always waste or fat in government spending that could easily be cut when times are tough? Probably so, but the problem is that everyone's list of unneeded programs differs. Tom's idea of a wasteful program may be Dick's example of a crucial one. Indeed, if there weren't supporters of a program, it likely wouldn't be in the budget. So for spending to be cut, widespread agreement must be reached on what programs to reduce, and this is hard to get.

Is the answer to the budget gap higher taxes? There are issues here too. Every dollar the state takes from households and businesses is one less dollar those private entities have to spend. So taxing is a matter of substituting state spending for private spending. The decision, therefore, comes down to whether state spending is viewed to be more important than private spending. For example, is it more important to spend more on public education and mental health care or on food, clothing and rent? Not an easy call.

There's also a concern that higher taxes may make the state less competitive in attracting businesses and jobs. One of the factors a business considers in its location decision is the level of taxes in a state and the quantity of services supported by those taxes. If a business perceives higher taxes are not matched with greater public services it values, the state may be dropped from its list of potential sites.

If there's a theme here, it's one of choices, which puts us right back at budgeting. Because that's essentially what a budget is, a document presenting the choices that have been made. But since choices, by their nature, mean giving up one thing at the expense of others, budgeting is hard - very hard.

So while there's no easy answer for the state budget, I think you'll decide there is one easy conclusion. There's no non-controversial road to a balanced budget.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ncsu.edu/waldenradio/

Posted by Dave at July 24, 2009 08:40 AM