I love this budget surplus! Use it for bulletproof state finances.
by James A. Bacon
There is good news for Virginia on the tax front. We have to make the most of it.
The Old Dominion ended fiscal 2022 with a General Fund revenue surplus of $1.94 billion, Governor Glenn Youngkin announced yesterday. Total revenue increased by 16.3% over the prior year.
“Fiscal 2022 was an extraordinary year for revenue and ended strongly,” said Finance Secretary Stephen Cummings. While the state has yet to recoup all of the 133,000 jobs it lost during the pandemic, job growth has been strong this calendar year — 3.5%. And WWhile competing states all exceed their pre-pandemic employment levels, Virginia has scored a few economic development moves – LEGO, Raytheon and Boeing in particular. OIn the first four months of 2022, Virginia ranked 15th nationally among states in job growth.
Youngkin argues for returning some of the excess revenue to taxpayers, who are being crushed by 9% inflation. I am nice. Taxpayers are having it. But I have bigger concerns.
In all likelihood, Virginia’s economic and fiscal pushes are unsustainable. These are byproducts of economic recovery from COVID-19 shutdowns and massive federal stimulus. The effects of the COVID recovery are largely spent and the federal stimulus is not sustainable. The political class in Washington has deluded itself that it can continue to increase deficit spending with economic impunity, but history suggests that it cannot.
In the video above, author John Rubino describes how the United States – like other developed countries with profligate central banks – is approaching debt saturation. “We have borrowed so much money that we have to keep interest rates low to make this debt manageable,” he explains. “But by keeping interest rates extremely low, we actually have to create a lot of new currency…to buy the bonds whose yield we’re trying to drive down. And that leads to inflation, which drives up the interest rate because no one wants to lend money if it has to be repaid in a depreciating currency. …And that makes debt management impossible. That’s kind of where we’re at. this moment.
As columnist Kimberly Strassel observes today in The Wall Street Journal, the United States no longer has the party of fiscal austerity. There are still Republicans still worried about deficits and debt, but plenty of R’s vote with Democrats, who have convinced themselves that deficit spending and monetary stimulus don’t have meaningful consequences. Blaming 9% inflation on Putin’s war in Ukraine and COVID-related supply disruptions, economic illiterates argue that this inflation is transitory.
It’s true that the Fed has raised interest rates slightly, but when 1-year Treasuries are yielding 3% and inflation is 9%, that’s an inflation-adjusted interest rate of minus 6%. It is not a restrictive monetary policy. It will do almost nothing to suppress inflation. But monetary tightening could be enough to plunge the United States into a recession. Rubino foresees two possible scenarios: one in which the political class abandons the fight against inflation, which then rages higher, and the other in which monetary tightening leads to an unpleasant recession in which the debt-ridden economy s collapses like a deck of cards. With real interest rates at -6%, the Fed is running out of tricks to keep playing.
What makes the problem infinitely worse is that all of the world’s major central banks have pursued loose monetary policies and accumulated debt. The European Central Bank still has negative interest rates in nominal terms, not just in inflation-adjusted terms. China is facing the collapse of its housing market, which accounts for 75% of all personal wealth in the country. Japan has accumulated the largest national debt-to-GDP ratio in the world, made possible only by a severe crackdown on interest rates. As food and energy prices soar, civil unrest spreads to developing countries – as evidenced more recently by the government collapse in Cyprus, where foolish green policies have ruined the agricultural sector critical. How will the shock of sovereign debt defaults be transmitted to the global economy? It is someone who guesses.
We do not know how the global experience of massive indebtedness will end. Maybe brain confidence in Washington, DC will manage to navigate through another economic cycle without triggering another depression. But anyone sensitive should be able to recognize that the systemic risks are incredibly high.
Where does that leave Virginia? As I have argued since the publication of “Boomerddon” in 2010, we must protect our public finances. When the federal treasury disintegrates, state fiscal solvency will be the only thing standing between citizens and the collapse of society.
Youngkin and the General Assembly make small installments to achieve this goal. According to Martz, Virginia will add $250 million to reduce public pension liabilities, for a total of $1 billion. In 2021, according to the Reason Foundation, Virginia’s unfunded retirement liability was $5.97 billion, making Virginia’s retirement system 94% fully funded, a huge improvement from the recession. of 2007. Unfortunately, negative investment returns this year mean that public pension fund deficits are expected to exceed $1 trillion by the end of the year. Virginie is not exempt.
Meanwhile, no one knows exactly how much debt other state and local authorities have racked up or what the quality of those investments is. Nobody did an audit. We just don’t know. Maybe the United States can avoid its economic calculation and Virginia has nothing to worry about. But maybe it can’t. While I’d love to give money back to the taxpayers, I’d rather have functioning state and local governments in the event of fiscal cataclysm.