Public Assets Institute > Policy Areas > Family Economic Security > Spending caps undermine the state budget’s purpose

Spending caps undermine the state budget’s purpose

Tying public spending to any measure of economic growth is a double whammy for Vermonters in bad times: When the economy slows, it takes state spending down with it. So Vermonters not only have to deal with job and income losses during a recession, they also get hurt by a reduction in state services just when they need them most.

Nevertheless, the governor has proposed restricting state General Fund spending growth to the average growth rate of wages over the prior six years.

Given the countercyclical nature of public investment—spend more when the economy is slow, reduce spending and save when the economy picks up—concerns that the state budget is growing too fast are overblown. It’s true that for the past few years state General Fund spending has grown faster than the economy. But there was a lot of lost ground to make up following the Great Recession. Over the last 20 years state spending has in fact grown more slowly than the economy, and wage growth has been even slower.

According to Vermont statute, the purpose of the state budget is to “address the needs of the people of Vermont in a way that advances human dignity and equity.” This applies in good times and bad. And that’s why public spending should buck the economic trends. There’s greater demand for food stamps and housing assistance, for example, when the economy slows. The administration’s proposal to tie General Fund spending growth to wage growth undermines the fundamental purpose of the state budget.

But there are other problems with this approach to budgeting.

Cutting back on public investment aggravates a slowing economy. The Center on Budget and Policy Priorities found that Vermont was one of many states that reduced services in the midst of the Great Recession. These cuts “not only harm vulnerable residents but also worsen the recession—and dampen the recovery—by reducing overall economic activity.”

Another problem with a General Fund-only spending cap is that it reduces the budget debate in Montpelier to one question: How do we keep General Fund spending under the cap? The governor’s fiscal 2018 budget recommendation shows just how easy it is to keep General Fund spending growth low by moving expenses to other funds, like the Education Fund, without paying for them. A cap on General Fund spending, which is only a quarter of the state budget, encourages more of this cost shifting.

None of this is to say that Vermont should have unlimited state spending. Budgeting is a balancing act that requires thoughtful consideration of needs and resources. In times of greater need, spending should go up. When the economy is good, Vermont should plan ahead and save for leaner times, so that temporary revenue losses in bad times don’t lead to abrupt cuts to state services we all need.

Instead of working to meet an arbitrary cap, the budget debate in Montpelier should focus on how to make consistent smart investments that meet the state’s needs and build its future. That would be a better approach for the state’s economy and for Vermonters.

Posted by Stephanie Yu on February 24, 2017 at 3:54 pm

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