Policymakers are often under pressure to spend what is coming in the door. This is true even for the thoughtful ones. It happens at the state, county, and city levels. I have seen a lot of budgets developed over the years, and there is always something “critical” to fund. Here are some things to think about as we move into 2017.
First, there is basic risk. Under-forecasting tax revenue poses little harm while over-forecasting tax revenue, and appropriating those monies, can cause major budget problems. A forecast is part science, part guessing, and part identifying an acceptable level of confidence. If economic uncertainty goes up, by default, the forecast needs to come down. This is true unless there is a willful desire to lower the level of confidence in the revenue forecasts.
Second, there is indicator risk. Far too much weight has been put on the stock market as a leading indicator. The core economic indicators (like jobs, GDP, etc.) are nothing beyond modest while stock prices are soaring. In the short term the market can exceed the fundamentals of economic growth. This won’t happen longer term though. While AZ will outperform the nation, we are partially bound by the nation’s economic performance.
Last, there is broader political risk. Speculation regarding the President Elect’s economic plans has been on the high side. There is a lot we don’t know. I like enthusiasm, unless it makes you do stupid things. Policymakers need to view current activity as optimism that could deflate. It is easy for an economist to adjust a forecast. It is more difficult to adjust a budget. We can later spend the money we find in the couch cushions, but we can’t spend what we don’t have, at least at the state and local level.
Despite these words of caution, there are still things we can do here in AZ to further boost our own economic performance. We will cover that issue later in the month.
Author’s note: If there is a particular economic or policy issue you would like covered in a later publication feel free to send your ideas and/or comments to firstname.lastname@example.org.