Four-Year Budgeting: Unreliable Long-Term Forecasts Could Harm Public Priorities

Part Three in a Series on Washington's Long-Term Fiscal Challenges

Without the ability to address Washington’s flawed revenue system, current proposals requiring the budget to be balanced over four years (instead of the current two year cycle) would force policymakers to cut important public health and education priorities over the long term.  A major reason is that long-term revenue forecasts tend to be highly unreliable.

As we noted in parts one and two of this series, balanced state budgets are key to maintaining important priorities in the long run. However, economic uncertainty makes it extremely difficult for forecasters to develop reliable long-term revenue estimates.

The graph below shows that forecasters tend to be overly conservative when estimating revenue growth following a recession and overly optimistic during an economic peak. Following the “dot-com bust” recession of the early 2000s, the state Economic and Revenue Forecast Council (ERFC) under-estimated state tax collections by about $2.8 billion prior to the 2005-07 budget cycle.

Under current budgeting practices, it is entirely appropriate for the ERFC to be extremely cautious when projecting state revenues following a recession. However, under the proposed four-year balanced budget requirements this approach could harm public investments by creating a “ratchet effect.” 

That means overly pessimistic forecasts would require policymakers to enact unnecessarily deep cuts to public health and education infrastructure in order to keep the budget balanced within the depressed revenue estimates. And, deeper-than-necessary cuts to these and other vital components of the state economy would greatly harm the state’s ability to recover following a recession.

The “ratchet effect” would be less severe if the legislature were able to raise additional revenues, which would increase the revenue forecast and mitigate the need for excessive cuts. Yet the onerous, minority rule requirement established under I-1053 makes it virtually impossible for the legislature to meaningfully increase revenues under current law.

Without the ability to address Washington’s flawed revenue system, proposals to mandate a four-year balanced budget would simply force policymakers to abandon our commitments to building a robust and vibrant state economy.

This is the third post in a series on Washington’s long-term fiscal challenges. Be sure to check out parts one and two. More to come.