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August 1, 2013

DeBoer: Making state government smaller

— July 11 was one of the great days on the number-crunching calendar. It was Indiana’s “close-out,” the day the Indiana State Budget Agency wraps up the numbers for the fiscal year.

And there’s no doubt, we’re in good shape. We took in more revenue than we spent in fiscal 2013, and we’ve got nearly $2 billion in the bank, which is a healthy 13 percent of the total budget.

We’re doing better than most states. The National Association of State Budget Officers collects budget information from all the states and ranks measures of “fiscal stress.” Indiana was one of 11 states in the “All Systems Go” category. Most of the Midwest was in the second-best category, “Holding Up,” while Kentucky was in the middle, “Could Be Better, Could Be Worse.” New Jersey and Georgia ranked lowest, in the dreaded “What Recovery?” category.

This is a huge turnaround from fiscal years 2009-11, when revenues fell short of the budget by $4.6 billion. Balances shrank to 6.7 percent of the budget in 2010, close to the 5 percent rock-bottom minimum.

How did we recover so fast?

Budgets are really pretty simple. You start the fiscal year with some balances in the bank. During the year, some revenues come in, some expenditures go out. You make a few adjustments, and you’ve got some balances left over at the end to start the next year. The way to increase balances is for more revenues to come in than expenditures go out. The budget recovered because more revenues came in, or fewer expenditures went out - or both.

Let’s start with revenues. They depend on tax rates and the tax base. Our tax rates are down since the recession. Corporate, individual income and inheritance tax rates have been reduced. We didn’t raise taxes to generate more revenue.

How about the tax base? Taxes are paid out of incomes, so let’s look at personal income, which is the sum of wages and salaries; interest and dividends; and other income earned in Indiana. Since the end of the recession in the second quarter of 2009, Indiana’s personal income has grown 13.7 percent. The U.S. average is 14.5 percent, which makes it look like Indiana growth is lagging a little.

But the U.S. average is pulled upward by the incredible growth in the energy states, led by North Dakota at 42.5 percent. The median growth rate is a better measure of what’s typical. The median is the middle value, with an equal number of states above and below. Indiana ranks 26th in income growth among the 50 states and the District of Columbia. Twenty-five states [including D.C.] grew faster, and 25 states grew slower. So what about that? Indiana is the median state.

All this just says that it’s not a booming economy that has caused Indiana’s budget to recover so fast. It’s the spending side that tells the story.

Indiana pretty much froze appropriations between 2009-13. Appropriations were near $14.5 billion each year. In the budget for 2014 and 2015, appropriations grow an average of 2.2 percent per year. That’s pretty slow. You can see that with a couple of comparisons.

From fiscal 2009 to the budget for 2015, appropriations [plus a few adjustments] will have grown 6.4 percent in total. In the recession and recovery before that, from fiscal 2001-2007, appropriations grew 21.3 percent. This time, we restrained spending a lot more than last time.

In 2009 Indiana’s state appropriations were $14.436 billion. Since then, state population growth has averaged 0.4 percent per year. Inflation has averaged 1.5 percent per year, according to the Gross Domestic Product deflator.

So, to buy the same amount of state services per person, appropriations would have to rise about 1.9 percent per year from 2009 to 2015, to $16.190 billion. Budgeted appropriations for 2015 are actually $15.392 billion, about 5 percent less than that. We’d have to accelerate appropriations to catch up to where we were before the recession.

We decided not to bring the budget back to where it was before the recession, in real, per capita terms. And, since there are more tax cuts to come, pretty clearly we’re not planning to let the budget accelerate.

Indiana’s budget recovered so fast because we made state government smaller.

— Larry DeBoer is a professor with the Department of Agricultural Economics at Purdue University.

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