What will an 'all cuts' budget look like?

San Francisco Chronicle, April 10, 2011

Lacking the votes to put his budget proposal of spending cuts and tax increases before the electorate, Gov. Jerry Brown now is drawing up a new "all cuts" budget to close a $15.4 billion state deficit. "All cuts" sounds simpler than persuading Republican legislators and the electorate to increase taxes, but the human and fiscal costs of such a plan may outweigh savings.

How? By further weakening the state's economy and adding at least a point to the state's 12.2 percent unemployment rate.

In the dry language of the government budget documents, cutting spending is mere subtraction. But government spending also fuels life around the state, especially in rural areas with limited retail and industry. In California, government activities - federal, state and local - represent 11.9 percent of the state's gross domestic product. Reducing government spending eliminates jobs.

Public employees who have lost their jobs spend less and pay fewer taxes, which in turn undermines local business, which then is forced to lay off workers. We got a glimmer of this when state employees were ordered to take furloughs to reduce state spending, which slowed economic activity in the Sacramento region. Economists say the loss of 140,000 jobs would add a full point to the state's jobless rate.

At state Senate budget committee Chairman Sen. Mark Leno's request, the Legislative Analyst's Office has outlined what it would take to close the deficit with an "all cuts" budget.

Under the assumptions Leno outlined, the cuts to education spending alone would add nearly a full point to the jobless rate because unemployed teachers wouldn't be spending as much in their communities. Or paying as much in taxes, which affects the state's ability to repay borrowed funds.

Reduced tax revenue flows, not just state budget deficits, worry bond traders, and also make the state less attractive to investors.

And then there are the proposed cuts to health and social services, criminal justice and the judiciary, government, resource and transportation, which could push the jobless rate closer to two points higher.

Is this bleak scenario really California's future?

"I do not see the Democrats willing to cut further than they have already cut," said state Sen. Bob Huff, Diamond Bar (Los Angeles County), the Republicans' point man on the budget negotiations.

Huff, who is quick to say some Senate Republicans didn't want to go to an "all cuts" budget either, discounts the Democrats' cutting priorities as attacking only the symptoms of the problems that drive the budget deficit ever deeper. His party's preferred solutions include putting new state hires into 401(k) retirement plans rather than into ever-more costly pensions.

Huff says his constituents are less moved by the specter of rising state unemployment than by concerns over continuing an unsupportable level of state government.

The other part of the Democrats' "all cuts" budget scenario is a plan to do away with the agency-level of government and instead rely on state departments to deliver services. The state Environmental Protection Agency as well as the State and Consumer Services Agency, among others, would go. But neither the state Board of Equalization nor the state Franchise Tax Board are targeted. The Legislative Analyst's Office recommended merging the two tax agencies 70 years ago, said LAO spokesman Jason Sisney. It was a nonstarter then. "And it's not a near-term money-saver now."

All budget solutions are not the same

Some affect more jobs in the state than others because of federal matching funds, wage levels and what economists refer to as the multiplier effect, which is different for different kinds of spending, according to Sylvia Allegretto, an economist with the UC Berkeley Center on Wage and Employment Dynamics.

This allows us to compared the number of jobs lost for each $1 billion cut from certain kinds state spending with the number of jobs lost for each $1 billion in increased taxes.

-- Cut $1 billion, what do you get?

163,200

Jobs lost as a result of cuts to in-home supportive services

27,000

Jobs lost as a result of cuts to child care

27,000

Jobs lost as a result of cuts to Medi-Cal

19,000

Jobs lost as a result of cuts to education

9,900

Jobs lost as a result of general state spending

-- Tax $1 billion, what do you get?

6,200

Jobs lost from taxing upper-income households

2,200

Jobs lost from taxing corporate income

300

Jobs lost from extracting oil

The multiplier effect

Another way to think about the multiplier effect is the return on each dollar put into the California economy. For example:

1:4.3

For Medi-Cal spending

$1 spent on Medi-Cal is matched by the federal government with $1, and generates an additional $2.30 in economic activity to produce $4.30 in economic output.

1:2

For education spending

$1 spent on education injects $2 into the overall economy.

1:1

For cutting taxes

on upper-income

households

$1 not paid in taxes is $1 put into the California economy.

1:0.32

For corporate tax cuts

$1 corporate tax cut increases economic output by 32 cents.

Source: UC Berkeley Center for Labor Research and Education

 

Original Article