Vermont’s economy is growing, but not quite as quickly as the state’s economists predicted.
Jeffrey Carr, the Shumlin administration’s economist, and Tom Kavet, the Vermont Legislature’s economic analyst, told the governor and lawmakers on Wednesday that they have downgraded revenue projections for fiscal year 2014 by $20 million.
Tax receipts for three funds — the General Fund, the Transportation Fund and the Education Fund — will likely falter slightly as the economy slows because of the European debt crisis and the partisan bickering in Congress over the nation’s spending priorities, tax increases and rising debt levels.
Were it not for the congressional wrangling, Kavet and Carr said, the nation’s economy would grow by 4 percent this year.
The economists both emphasized that Vermont’s economy continues to grow slowly in spite of international and national fiscal problems. They attribute the downgrade to “a downshift in the macroeconomic outlook,” Kavet said.
The state’s General Fund will have $11.1 million less than anticipated; the Transportation Fund will be down $5.6 million and the Education Fund will drop by $2.6 million in fiscal year 2014.
Kavet and Carr said they often modify macro forecasts from Moody’s Analytics when they predict the state’s economic outlook. This time, however, Kavet said, they “made more of a departure” from Moody’s “than we’ve ever done before.”
“They are considerably more pessimistic than we are,” Kavet said. “Some of that has to do with their assessment of what federal cuts might do disproportionately to some states.”
The economists say they don’t believe potential federal cutbacks will impact Vermont as severely as previously projected. Moody’s ranked Vermont as one of the fifth most adversely affected states.
Carr said he and Kavet dug into the national and state macro numbers for 2012 to make adjustments to ensure the data accurately reflected actual revenues collected.
“That’s what made this forecast part challenging,” Carr said. “We not only have to understand the data but we also have to understand how the data may be wrong before we can start.”
If Carr and Kavet had used a “straight” Moody’s analysis, the downgrade could have been as high as $30 million.
“Our general outlook is more optimistic than Moody’s but it’s still a bit of a downturn,” Kavet said. “I think there’s still a lot that can go right. The economy is really poised to do much much better.”
“We’re surprised, at least I’m surprised, that we’re sitting here so far from the bottom of the Great Recession and we’re not talking about forecast upgrades which we normally we would,” Carr said.
Downside risks could continue to hamper Vermont’s economic growth. The European debt crisis is reverberating, housing starts remain very weak, federal cuts could hurt growth and corporate tax receipts could be “very volatile going forward,” Carr said.
Residential construction activity is slowly climbing back, “but it’s a long slog up,” Kavet said. The bottoming out of the sector was somewhat masked by non-building projects like the Lowell wind project and a VELCO transmission line project that kept the construction industry busy during the nadir of the Great Recession. For that reason, it’s hard to tell exactly how much growth is the result of an overall economic upsurge.
“Our low was actually artificially higher than it should have been, but the fact that we’re now back to where we were at the bottom of the construction market with all three types of construction is an indication of just how long the slide has been,” Carr said.
There has also been a “downdraft” from the federal stimulus investments of $400 million in Vermont programs and infrastructure from 2009 to 2012. The money helped to stimulate the economy, but the funds weren’t replaced by new revenues and the economy contracted, Kavet said.
This year the state’s General Fund revenues will increase by 4.6 percent; last year the fund grew by 5.5 percent. Early estimates from state budget writers show that the General Fund gap between revenues and expected expenditures is $50 million to $70 million.
Overall state spending in fiscal year 2013, including the budget adjustment, other state funds and federal dollars for transportation and Medicaid among other federal expenditures, went up by 6.7 percent. Total state expenditures were $5.1 billion.
Gov. Peter Shumlin said his administration will present the Legislature with a balanced budget on Thursday, and the downgrade makes doing that “$11 million more difficult.”
“The good news is, we continue to see higher revenues than we did the previous year because Vermont is experiencing slow economic growth,” Shumlin said. “As long as Congress continues to muddle with our economy, we’re going to continue to have some insecurity with our business folks who need to make investments to grow jobs and the economy. We want Washington to get their act together. Meanwhile, Vermont is growing faster than most other states, and this is generally good news.”
When asked if Shumlin would include tax increases in his budget address, he said, “Stay tuned.”
The governor hinted that he may raise gas taxes to help shore up the Transportation Fund in order to continue to repair the state’s crumbling infrastructure. The state needs to come up with roughly $30 million to match federal highway funds this year.
Carr said the Transportation Fund and Education Fund revenues are “less robust” than the General Fund. The Transportation Fund revenues have been reduced by $5.6 million or 2.3 percent for fiscal year 2014.
“That’s an unusually large downward adjustment,” Carr said.
The culprit is a structural issue with the fuel tax, he said, which has been declining as more Vermonters drive less and use more efficient vehicles. He also pointed to a drop in fees and motor vehicle purchase and use taxes. “On the fee side, we’re just not getting the revenue we expected from the fee changes 18 months ago,” Carr said.
Editor’s note: This story was updated at 6:12 a.m. Jan. 24.
