D.C. and Europe woes renew Mass. fiscal challenges

From The Beacon, December 2012

The Capitol Hill stalemate over the federal “fiscal cliff” and the new recession in Europe have triggered deep fiscal concerns here in Massachusetts and are weakening our state’s economic performance. These are the major factors behind rising unemployment and sagging state tax revenues, which will likely force the state to announce mid-year spending controls and budget cuts in early December and make the fiscal 2014 state budget process exceedingly difficult.

This is unpleasant and unwelcome news, especially after Massachusetts had recovered from the Great Recession more quickly than the rest of the nation.

The MMA has been outlining the fiscal cliff dangers for many months. Unless congressional leaders in Washington, D.C., can agree to a deal before Jan. 2, taxes will rise for every household and wage earner in the country, hitting the middle class especially hard (because the temporary 2 percent cut in the payroll tax would end, and income tax rates will go up as well). Economists warn that this could cause a significant drop in the GNP – at least 1 percent – which could trigger another recession.

In addition, automatic, across-the-board budget cuts (through the sequestration process) would slash billions from the federal budget in the middle of the fiscal year, harming important programs and services and adding a further drag to the economy.

Here in the Bay State, sequestration cuts could rip nearly $100 million from cities and towns and community-based programs, and slash millions more from state programs as well.

Uncertainty about whether Capitol Hill gridlock will block a resolution to the fiscal cliff crisis has undermined our economy. Businesses, employers and consumers have withheld investments because it is unclear what will happen to tax rates, programs and the economy. This explains why the stock market has been on a downward trend since the election, as investors have become acutely aware that time is running out.

This in not a far-away political battle; the impact of gridlock is being felt right here in Massachusetts. It has stalled our economy and contributed to our state revenue shortfall.

In late November, it became official: Europe is again in recession. The region’s economy has contracted in each of the past two quarters. Europe has struggled to recover, especially in the southern regions, ever since the global financial crisis in 2008-2009. Almost all solutions have focused on “austerity” measures to combat excessive debt, undermining the stimulus investments that are usually necessary to spur an economic recovery. We think an unemployment rate of 7 percent is unacceptable in the U.S., but Spain and Greece have unemployment rates approaching 25 percent.

As it turns out, bad news in Europe is also bad news in Massachusetts, because our state’s economy relies on exports more than the nation as a whole. Thus, if Europe is in recession, our business sales drop, harming our economic performance.

As economist Alan Clayton-Matthews explains in the most recent “MassBenchmarks” report: “The state’s economy slowed sharply in the third quarter of 2012 (because) economic difficulties in Europe and the global growth slowdown continue to act as a drag on the state’s economy. State exports in the first eight months of the year were down 5.9 percent [and] the Commonwealth’s weaker performance reflects its higher reliance on Europe as an export destination.”

Although there has been great awareness of the Washington stalemate over taxes and spending, and a lot of reporting on the troubled European economy, the citizens of Massachusetts are probably unprepared for what may happen in the near- and long-term.

The Patrick-Murray administration has announced that state revenues have fallen short of budget needs by $256 million in the first four months of fiscal 2013. Administration and Finance Secretary Jay Gonzalez has stated that mid-year cuts to the state budget are very likely.

The implication is that the bleak revenue trend will continue for the rest of the year, given the gloomy news from Washington and Europe, and the state will need to cut spending. This will be extremely disruptive.

The MMA has explained that mid-year cuts to municipal and school programs would be impossible for cities and towns to absorb without extreme pain, and we will continue to work to protect these accounts. No specific plans have been announced by the governor, but all stakeholders expect to learn of the administration’s proposals and plans early in December.

Looking ahead, this fiscal difficulty will spill over to fiscal 2014 in two major ways. First, with Massachusetts unemployment up and economic activity down, tax revenues are unlikely to rebound until our state economy strengthens, which may take a year or more. This means that state government will have less, making the fiscal 2014 state budget process very challenging and potentially painful. Second, if Washington does allow deep program cuts to take place, cities and towns will lose valuable revenue and have no way to replace the funds.

Some readers are certainly remarking that this column is a pretty gloomy way to start the holiday season. That may be true, but as Jim Collins, the author of “Good to Great,” says, one of the most important strategies for success is to “confront the brutal facts.” When we can fully envision the problems ahead, it is much easier to overcome them.

What’s the best strategy for the coming months? To stand together, unite, collaborate and advocate for the local aid, tools and resources necessary to ensure stability and investment in communities. Local officials in every corner of the Commonwealth know that strong cities and towns are essential to our economic and fiscal future. Massachusetts will not recover if Capitol Hill cuts and Beacon Hill revenue shortfalls are simply shifted down to communities and neighborhoods.

The MMA’s mission is to stand with every community from the Berkshires to Boston, from Cape Cod to Cape Ann, and all places in between, to protect and advance local government. This work will be more important than ever during the next year.