RI BUDGET CRISIS:
BEHIND THE NUMBERS

BankRI, Lardaro on the Economy Series
September 2003
 

Hardly a day goes by when we're not reminded of Rhode Island’s budget crisis. The focus of recent battles between the governor and the legislature was, not surprisingly, on specific measures to balance this fiscal year's budget and to make next year's budget more manageable. Conspicuously absent from this discussion was how past decisions have influenced the situation we are currently facing and the impact of today’s decisions on future budgets. For not only does the current state of the economy influence the budget, the size of our economy and past growth rates matter as well.

Until recently, Rhode Island was a lagging economy. Its slower growth translated into less tax revenue than what we would have generated had growth been more rapid. What we are lacking is called fiscal dividend -- the added tax revenue resulting from economic growth. (See http://www.uri.edu/artsci/ecn/lardaro/Fiscal_Policy/frame.htm)

In navigating its way through the remainder of this budget crisis, Rhode Island must reinvent itself, since the reason we are not currently lagging the nation can be summarized in two words: “dumb luck.” Our failure in the 1990s to amass a high-tech presence along with our punishing high marginal tax rates has actually helped the current budget situation. Unfortunately, when the national economy improves, we are poised to re-emerge as a lagging economy.

Because Rhode Island is a high tax, high-cost state, which continues to under-allocate resources to education, past decisions (or non decisions) of our leaders have come back to haunt us. A central focus in any upcoming budget discussion, which will critically impact growth and future tax revenue, is the types of spending cuts that are to occur. Cuts should be far more concentrated on consumption- oriented spending (on current goods and operational expenses) than on investment-oriented spending which produces economic growth, a larger future economy, and more fiscal dividend.

So, critical choices must still be made. If we take the easy way out, we will have missed a critical opportunity to make our economy more dynamic and to help us avoid fiscal crises like the present one in future years.

by Leonard Lardaro