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Wednesday, October 01, 2014         

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New revenue outlook sees 1.6% decline

However, economists say it is too soon to calculate the costs of the tragedy in Japan

By Derrick DePledge

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An uncertain state Council on Revenues agreed yesterday to reduce the revenue forecast for the fiscal year that ends in June, but economists urged Gov. Neil Abercrombie and state lawmakers to use discretion when applying the figures to the state budget.

The council, in a special meeting held at Abercrombie's request, projected a 1.6 percent revenue decline this fiscal year, down from the 0.5 percent growth economists had predicted earlier this month.

The new forecast puts the budget deficit at about $200 million this fiscal year and at nearly $1.3 billion over the two-year budget cycle.

Abercrombie asked for the special meeting so the council could consider the impact of the Japanese earthquake and tsunami, the unrest in Africa and the Middle East, and the potential loss of federal earmarks from Congress.

The Abercrombie administration estimated last week that revenues would decline 2 percent this fiscal year, creating a $232 million deficit through June and a $1.3 billion shortfall over the next two years.

Economists on the council said it was too soon to calculate the fallout of the Japanese tragedy on tourism. Passenger counts over the past few weeks suggest a 25 percent decline, but it could take weeks or months before the trend becomes clear. The threat posed from damaged nuclear plants in Japan is still unknown, so the full extent of the destruction, and its influence on the willingness of the Japanese to travel, is impossible to predict.

Economists said they accounted for the potential rise in oil prices because of the unrest in Africa and the Middle East in their last forecast. The potential loss of federal earmarks might not be felt until next fiscal year and beyond.

The council, however, did learn of an unusual drop in February tax collections, and that motivated economists to lower the forecast. The February figures could be an anomaly but could also mean the economy is not recovering as quickly as economists believed.

State Sen. David Ige (D, Aiea-Pearl City), chairman of the Senate Ways and Means Committee, said the committee would try to use the new forecast in the Senate's budget draft. But he said it is more likely that the adjustment will be made in Senate and House conference committee negotiations on the budget next month.

Ige said the Senate budget draft includes significant cuts to state programs. But he said senators might find it difficult to make additional cuts in areas such as education, social services and health considering the reductions that have already been made over the past few years during the recession.

He said lawmakers would likely look at new revenue-generating ideas and hope the governor achieves labor savings in contract talks with public-sector unions.

"How do you tweak the revenue things that we're looking at already, to try and make up that difference?" Ige said of the new forecast. "The budget cuts are getting harder and harder to find, so, you know, I don't know how much more we can cut in the budget. So it's really labor savings and revenue, and we'll see how that plays out."

Senate leaders have discussed raising the general excise tax the state's largest source of revenue but Ige said there is no move toward that option yet.

House leaders have opposed a GET increase. State Rep. Marcus Oshiro (D, Wahiawa), chairman of the House Finance Committee and the chief House negotiator on the budget, said that if the Senate wants a GET increase to be part of the budget debate, senators should pass a bill before the procedural deadline to exchange bills with the House in mid-April rather than wait for conference committee.

"If I don't see a GET proposal come out from the Senate, in my mind there is no GET to consider in conference," Oshiro said.

State House Minority Leader Gene Ward (R, Kalama Valley-Hawaii Kai) said that while the deficit appears daunting, he believes the budget can be balanced without a GET increase.

Abercrombie, in a statement, said his administration would use the state's hurricane relief fund, the rainy day fund, other special funds and a 10 percent spending reduction at state departments to close the deficit this fiscal year.

The governor said the budget outline he released in February still stands as an option for the following two years.

"Our plan will add $1.3 billion to Hawaii's economy creating jobs and building critical infrastructure like schools, clean-energy projects and public facilities," he said. "Our plan restores critical government functions to help local businesses and invest in education. The plan balances the budget by making changes to the tax code, labor savings and spending cuts."

Paul Brewbaker, an economist and the chairman of the Council on Revenues, cautioned that the new forecast could be off by 2 percentage points.

The governor and state lawmakers are required by the state Constitution to use the council's quarterly forecasts as guides when drafting the budget, but they have the discretion to use different figures as long as they disclose it publicly and explain their reasons.

Brewbaker said the risk in the council meeting too often is that economists might be overly influenced by current events, rather than longer-term trends, which can lead to wider variations in their forecasts. He said the council should have more information about Japan by its next scheduled meeting in May, and even more data by the next quarter, to measure the impact on state revenues.

"If we had meetings every two weeks, we would always be changing the forecast by large numbers," he said. "That's because the noise like month-to-month revenue changes tends to dominate over the signal."






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