Tuesday, May 14, 2013

May Revise Budget Forecast

A lot of people are surprised at the pessimistic tone of the economic and revenue forecast in the revised budget released today.  I don't think the actual economic outlook has declined, it is just that the Governor is backing away from the relatively optimistic forecast they assumed for the January budget release.  Using a slightly optimistic forecast in January allowed them to declare that the 2013 budget was balanced with much fanfare in the local, state and national press about California's comeback and the Governor's success.

This is what I wrote in January when the Governor's original budget was released.

"People most often ask me about the economic and revenue forecast in the budget. I think it is a little optimistic, but not unreasonable, and it is important to note that their forecast optimistically assumed the 2% payroll tax cut would be extended for 2013. That assumption obviously turned out to be wrong, and will have an effect on future forecasts for the May revision. My initial estimate is that revenues are probably going to be $1-2 billion less than their projections, a little larger than the budget's reserve."

In other words, I thought the January budget actually had a slight deficit that was being covered up by a moderately optimistic forecast.  The May revised budget released today has $1.2 billion less spending for 2013-14 than the Governor's January proposal, in line with the $1-2 billion deficit I predicted in January.   Also, the budget decrease for 2013-14 isn't quite as bad as it looks, because spending in the current year increases with the shift of capital gains revenue forward.

The wild card is the extent to which capital gains were accelerated.  It should be noted that the Federal Government just announced a significant downward revision in the current year Federal budget deficit, but like California, it is largely attributed to a one time increase in capital gains income as investors accelerated capital gains into 2012 before taxes increased.  So California is not alone in viewing these income tax revenues as a one-time phenomena.

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