State Budget and the Fiscal Cliff

December 5, 2012

In recent weeks, you may be familiar with the news that both our state and federal governments are facing some serious challenges when it comes to solving the problems of budget deficits and continued indebtedness. The numbers are alarming. Here in Connecticut, the state budget is facing a $365 million deficit. In Washington, D.C., the federal government has accumulated an astounding $16 trillion in debt. This week, I would like to share some new information about the budget deficit and how the so-called fiscal cliff could have an impact on families throughout our state.

On November 27th, members of the General Assembly’s Appropriations and Finance Committees came together to hold a joint meeting about fiscal accountability. The main purpose of the meeting was to hear directly from the Governor’s Office of Policy and Management (OPM) about the state of the budget deficit. Prior to the election, the deficit was estimated to be $60 million. Now, less than a month later, it is projected that the state budget deficit is actually $365 million. And future estimates only get worse. In fact, the deficit is projected to hit an astounding $1.1 billion in the next fiscal year and continue at this level for several years afterward.

How exactly did we get to this point? In 2011, the Governor and his majority passed a budget that included an increase in spending of $857 million in the first year and $1.16 billion in the second year. It also included the largest tax increase in Connecticut history of $3.9 billion over the same two year period. Despite that huge tax increase, the state budget, once again, doesn’t have enough money to pay its bills.

During the meeting, the budget secretary said several factors were to blame for the budget “shortfall,” namely greater expenses and fewer revenues than expected. The main factor is reportedly a large increase in Medicaid costs, with some estimating that the program will run $100 million over its budget. The lower revenues were blamed on the lagging European economy where many Connecticut products are exported. However, I do not believe it is fair to blame Europe for budget issues that were developed here in Hartford.

While these recent developments are certainly a cause for concern, the upcoming fiscal cliff could have an even more negative impact on our state. What exactly is the fiscal cliff? This term is used to describe a troubling situation of large tax increases and deep spending cuts that will affect the federal government if negotiations between Congress and the President are not successfully reached before the December 31, 2012 deadline. This unfortunate situation was developed during negotiations in 2011 that ultimately raised the debt ceiling but also sought spending cuts to deal with the mushrooming $16 trillion federal debt.

If no new agreement is reached, federal taxes will increase by a large margin, and many economists are concerned that this could send our country back into another recession. The combination of higher taxes and spending cuts would ultimately cut the federal deficit by half.

However, Connecticut families could be hit hard. Middle income families would see their taxes increase by $2,000 on average next year. Nearly 3.4 million Americans could lose their jobs, sending the national unemployment rate back up over 9 percent. The automatic 10 percent reduction in military spending would also affect military contractors, such as Sikorsky Aircraft, Pratt & Whitney and Electric Boat. Some estimate that stocks could tumble to points last seen during the Great Recession.

The impact of the fiscal cliff on our state is an unfortunate example of the overreliance on federal assistance. While the current administration has been enthusiastic at seeking federal partnerships, this is one concrete example of the complications with taking federal dollars to fund state projects. For example, how will the fiscal cliff affect the Hartford to New Britain busway? How will it affect Medicaid and healthcare? These questions remain to be answered.

Ultimately, legislators on both the state and federal level will have to make tough decisions to reduce the cost of government. While the U.S. Congress must come to an agreement to avoid the fiscal cliff, state legislators here in Connecticut will tackle the current deficit in special session later this month and then begin the new budget discussions during the upcoming legislative session that begins on January 9th.