Introduction
As Massachusetts begins the FY2010 budget process, the state faces a budget gap of more than $3.1 billion. In other words, the taxes and other revenues the Commonwealth is expected to receive will fall short of the anticipated cost of maintaining current services by that amount. This estimate is likely a best case scenario. It assumes that revenue does not fall any more than is currently anticipated and that inflationary and related cost increases in many areas of government would be only two percent. It does assume higher rates of growth for health care costs and other areas where the recession is leading to increasing demand for services.
This budget gap is the result of two factors:
- The nation is in the middle of a recession that will likely prove to be the most severe since the Great Depression of the 1930s. Recessions create fiscal problems for states because tax revenues decline as incomes and spending in the private sector fall, and at the same time the demand for services increases as people lose their jobs and rely on the state’s safety net.
- The Commonwealth has created structural budget problems for itself as a consequence of enacting permanent tax cuts in the late 1990s in response to temporary budget surpluses.1
This Budget Brief focuses on the state’s current fiscal crisis and estimates the size of the preliminary FY2010 budget gap.
Identifying and Closing a Budget Gap
A budget is “structurally balanced” when ongoing revenues are sufficient to pay for expenses. If the budget is not structurally balanced and there is a deficit, the Governor and Legislature will have to cut spending or increase revenues. Revenue increases can be either permanent (such as a tax increase, an increase in fees, or a new ongoing source of federal revenue) or one-time (such as a withdrawal from the Stabilization Fund – the “Rainy Day Fund” – or a transfer from a non-budgeted fund or other reserves, or temporary aid from the federal government). Similarly, spending reductions can be permanent, or they can be temporary, such as postponing spending by pushing certain payments off into a future fiscal year.
Staff
