Virginia Should Not Count On Federal Spending Plan To Balance Budget Budget should be balanced through spending cuts, not by using one-time federal revenues
In last week’s edition of The Bolling Report, I discussed various proposals that are included in my 2009 Legislative Agenda to help get our economy growing again. I also discussed several similar proposals that have been introduced by Republicans in the General Assembly.
In times of economic decline, recovery ultimately depends on consumer confidence and resurgence of the private sector, not the public sector. Recovery will occur when consumers spend more money on goods and services, which will enable new and existing businesses to invest and create jobs.
However, there are responsible steps that can be taken in the public sector to stimulate economic growth. I believe that Republicans in Virginia are trying to approach economic stimulus in the right way. Unfortunately, Democrats in Washington are going about it in the wrong way.
There are some things the government can do to help stimulate economic growth when the economy is in recession. For example, we could:
1. Cut individual taxes so families have more money to spend.
2. Cut business taxes and reduce regulations to encourage private businesses to invest and create jobs.
3. Provide tax incentives to help stimulate targeted sectors of the economy, such as housing, automobile sales, etc., and
4. Target financial resources toward “shovel ready” infrastructure projects that can help spur construction and related industries.
When evaluating the federal spending plan being advanced by President Obama and congressional Democrats by this standard, it is easy to see why Republicans are so reluctant to support this plan.
Last week Democrats in the House of Representatives approved the American Recovery and Investment Act of 2009. This so called economic stimulus plan would increase federal spending by $819B.
But on closer look, these proposals are not economic stimulus plans at all. Rather, they are massive federal spending bills that would result in the largest expansion of government in 40 years.
In the House, the Democrats spending plan would cost $819B. However, the plan only includes tax cuts of $275B. The remaining $544B represents spending on all sorts of federal government programs.
Unfortunately, most of this spending is not targeted toward things that will actually produce economic growth. According to the Wall Street Journal (WSJ), which called the Democrat’s spending plan a “40 Year Wish List”, only about 12% of the plan is actually targeted toward something that could plausibly be considered economic stimulus.
What about the other $544B? Here are some highlights:
- $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years
- $2 billion for child-care subsidies
- $50 million for the National Endowment for the Arts
- $400 million for global-warming research
- $650 million for digital TV conversion coupons
- $600 million for the federal government to buy new cars
- $150 million for the Smithsonian Institute
- $200 million for the National Mall, including $21M for new sod
The WSJ points out that another "stimulus" secret is some $252 billion for income-transfer payments -- that is, cash or benefits to targeted individuals or groups. For example, there's $81 billion for Medicaid, a federal subsidized health insurance program for low income families, and $83 billion for the earned income tax credit, which goes to people who don't pay income taxes.
Perhaps some of these things are worthwhile (some are actually very questionable), but they will not stimulate economic growth.
So if the vast majority of the Democrat’s spending plan will not actually help stimulate economic growth, why have they proposed these programs? Perhaps the most honest answer to this question came from President Obama’s Chief of Staff, Rahm Emanual, who said, “Never let a serious crisis go to waste.” What I mean by that is it's an opportunity to do things you couldn't do before."
This is why Republicans have rightly taken a unified position in opposition to this proposal. It is a massive spending plan that will balloon the size of the federal government and increase the federal debt dramatically, and it will do little to stimulate economic growth.
The federal spending plan also provides a windfall to state governments, many of whom, like Virginia, are currently facing huge budget shortfalls. The plan includes $79B for the State Fiscal Stabilization Fund.
According to an analysis done earlier this week by the Senate Finance Committee, the federal spending plan could result in more than $4B in additional funding for Virginia. The staff of the Appropriations Committee in the House of Delegates has estimated Virginia’s windfall at $6B.
While some of this funding may be helpful in stimulating economic growth in Virginia, such as appropriations for transportation and other infrastructure improvements, most of the spending is directed toward general government programs.
And at a time when the state is facing a budget shortfall of $3-3.5B, Democrats in the State Senate and the Virginia House of Delegates have wasted no time suggesting that we should used these funds to balance the state budget and lessen the need for spending reductions.
However, before we jump on the band wagon of using these federal dollars to balance our budget we need to carefully consider two important facts:
First, all of the funding providing under the State Fiscal Stabilization Fund will expire on September 30, 2010. In other words, this is one-time money, not an ongoing revenue stream.
In addition, there appear to be strings attached to these federal dollars that we should carefully evaluate.
For example, maintenance of effort requirements are attached to any funds that are received to support core responsibilities like public education and Medicaid. This means that the state may not be able to scale back these programs when the federal funds expire.
This begs the question, if we cannot afford these programs now, how will we be able to afford them in 2010?
The problem in Richmond is not that we need more federal money to support state spending on a one time basis. Our problem is that we are spending too much money relative to the tax revenues we are collecting.
Instead of propping state programs up by one-time federal dollars, we should be looking for ways to scale these programs back so we can afford them on an ongoing basis.
For these and many other reasons, Virginia should not rely on the federal spending plan to balance our budget.
While we can certainly use any funds the federal government appropriates for one time expenditures, or expenditures that will be completed before September 30, 2010, we should not rely on these funds to pay for ongoing programs. To do so would be fool hearty and only put off our need to reduce spending on these programs until a later date.
The problem we have in Virginia is simple.
Over the past two years we have assumed that we would take in more money than we had any realistic chance of taking in, and we have used this “funny money” to increase spending on new and expanded government programs.
In other words, there is the fundamental structural problem with our state budget and that problem cannot be addressed by using one-time federal dollars to fill the holes on a temporary basis. That problem can only be addressed by basing our budget on realistic revenue projections and reducing spending accordingly.
This week the Senate and House of Delegates will adopt their respective budget recommendations. It will be interesting to see if they adhere to these principles when developing their budgets, or if they fall prey to unrealistic revenue projections and an over reliance on the federal spending plan.
If they adhere to these principles we can address the structural problems in our budget the right way. If they do not, we will once again base our budget on a shaky financial foundation and put off the difficult decisions to another day.
EDITOR'S NOTE: At the time this column was being written, Democrats and Republicans in the U.S. Senate were discussing an alternative economic stimulus plan that may reduce some of the spending proposals approved by the House of Representative. However, details of the final Senate plan are not yet available.
Lieutenant Governor William T. "Bill" Bolling
bill.bolling@billbolling.com
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