Report: Spending Cuts Could Hurt Economy
As the General Assembly convened to erase a $365 million budget deficit Wednesday, the Connecticut Center for Economic Analysis warned that balancing next year’s budget solely on spending cuts could hurt the state’s economy.
The think-tank of economists concluded that cutting spending by more than $200 million in each of the next fiscal years could trigger hundreds of thousands of job losses.
“Such cuts would cost more than 5,000 jobs each year; if cuts rose to a billion dollars, the result would be a loss of about 25,000 jobs each year, eliminating essentially all jobs created since the recovery began,” analysts at the center concluded after running the two scenarios through economic models.
The state’s budget next year is about $1.3 billion in the red and just shy of one billion the following year. Gov. Dannel P. Malloy has said he doesn’t intend to raise taxes, which leaves him with very few choices.
In 2011, Malloy inked a deal with state employee unions that guarantees them no-layoffs until Jan. 1, 2015. That leaves him with spending cuts. It’s unclear where those cuts will be made and how deep they will go. He will present his budget in February.
Wednesday’s report from the Center for Economic Analysis encourages the state to maintain its investments by borrowing for capital projects, in order to off-set the spending cuts it will have to make.
“Even as the state cuts its current services budget it still has the capacity to push forward with capital projects, funded through bonding,” the report says.
While the approach leaves the public sector vulnerable to layoffs, the report believes the private sector gains from these capital projects would mitigate them.
The report entitled “Averting the Doldrums:Will Connecticut Avoid Recession?” concluded that job losses avoided by the matching capital expenditures would be concentrated in the private sector so that “the remaining private sector layoffs are in the 325‐382 range compared with 2,248‐2,308 with only state service cuts.”
It concluded that “the capital expenditures generate sufficient net revenues for government to more than cover the interest on the debt incurred to undertake the capital expenditures during construction.”
Malloy’s administration remains committed to cutting spending, but it has also said it would not cut back on its investments in capital projects. Some Republicans have criticized the sizable loans the state has made to various companies, including a hedge fund in Westport. But Malloy isn’t backing down.
Last week, when Malloy attended the opening of a new commercial business in the Colt building in Hartford, Malloy said he planned to stay the course and continuing to borrow money to pay for these types of economic projects. The business received a $500,000 grant from the state for improvements to the second floor of the building.
The report lauds the investment efforts the state already has made with Jackson Laboratories and the Hartford‐New Britain busway, which its group of economists believe will add jobs. But not as many jobs as they might have.
Economists at the center also concluded that if those investments were adding to investments made by previous administrations, then the economy would recover much faster. “Yet the indications are that this flow will contract significantly as a result of the Rell administration putting far fewer projects into the pipeline,” it says.
Fred Carstensen, one of the authors of the report, has applauded former Gov. John Rowland’s administration for putting billions into the state’s higher education system. The problem is, the investments weren’t linked to areas where our economy was growing, he said.
Meanwhile, Carstensen said former Gov. M. Jodi Rell and the Democratic-controlled legislature spent every dime available to the state while ignoring its economic trajectory as compared to other states.
Wednesday’s report echoed previous statements the Center has made about the state’s failure to track its economic progress.
“Like other states we’re caught in a national economy that’s been slow to recover,” Gian-Carl Casa, Malloy’s undersecretary for legislative affairs, said Wednesday. “We believe we’re on the right track by making the state live within its means. That’s part of remaining competitive with our neighboring states as a place to live and do business.”