Today, Mayor Bloomberg held his mid-year budget update at City Hall. Here is the big picture: The mayor is still planning for a severe but temporary downturn in revenues. But there’s a very real risk — one that went unmentioned by the mayor — that New York faces not a cyclical slump but a structural, long-term decline in its premier industry, financial services. In that case, the mayor’s plans — including a possible 15 percent hike in the personal income-tax rate — are a recipe for long-term disaster.

Three months ago, the city expected total tax revenues to clock in at $36.3 billion for the fiscal year that began in July. Now, based on worse-than-it-expected September and October tax collections, it expects to take in $35.1 billion for the year, three percent below the original plan and 6.9 percent below last year’s levels. In the year that starts next July, the city expects to take in $34.6 billion, $2.9 billion below the previous projection and 8 percent below 2008 levels. (These projections don’t include the effects of any proposed tax hikes.)

In light of these projections, the mayor has announced some gap-closing measures: cancelling property-tax hikes and homeowners’ rebates, cancelling a class of 1,000 police cadets, cutting another 0.83 percent of the city’s workforce through attrition and some layoffs, closing libraries a half-day a week, and the like.

All told, the service and staffing cuts, combined with service cuts announced last year, amount to 10 percent of planned agency spending for 2008.

But the scariest part of the mayor’s budget comes after July 1, 2010, a little less than two years from now.

Why? Starting then, the mayor expects tax revenues to start increasing at a fast clip again. By fiscal year 2011, tax revenues are supposed to resume the sharply upward march they had followed throughout the early 2000s, increasing by 7.3 percent that year and 6.1 percent the following year. By fiscal year 2012, the mayor expects tax collections to exceed their bubble-era 2007 levels.

Yes, the mayor has made some reductions to previous expectations here, too, but there’s a real risk that it’s not enough.

That risk comes from the fact that Wall Street, as the city has known it for more than two decades, may have come to an end. Just yesterday, for example, JPMorgan Chase made plans to close its proprietary trading desk. This move signals that the firm doesn’t want to, or can’t, continue to take outsized risks with its shareholders’ and lenders’ money, not just for right now, but for years into the future.

This change means a severe, long-term readjustment for New York.

Wall Street two years ago provided 36 percent of all wages, income, and bonuses in the city, about 10 percent of direct business-tax revenues. It provided a far greater percentage of personal-income and indirect tax revenues. Without an unsustainably growing Wall Street, the city cannot depend on the kind of outsized tax-revenue increases it saw in recent years — an increase of 41 percent, after inflation, between 2000 and 2007, for example — to keep it afloat.

If the city cuts basic services now and finds that in two years, Wall Street hasn’t come back, its prize will be, at minimum, a $5 billion budget deficit, or more than 10 percent of city-funded spending. In such a case, New York would have to cut basic services even more harshly, by up to 25 percent. Such cuts could severely impact New Yorkers’ quality of life.

What can the city do to avoid that fate?

It has to start acting now to control the biggest part of the budget. So far, more than half of the city-funded budget has escaped any scrutiny or budget cuts, despite the mayor’s announcements. That part of the budget is pension and healthcare costs for city workers, debt service costs, and Medicaid costs. These costs now represent $23.3 billion annually.

The mayor continues to say that such costs are “uncontrollable.”

But the city could “control” healthcare costs, for example, by negotiating with unions so that workers pay 10 percent of their own health-insurance premiums, common in the private sector. And, it could work with Albany and Washington to reform Medicaid and pare just 10 percent of that program’s local spending, likely without harming service and even improving it by cutting out the fraud, bloat, and patronage. Savings from such reforms would be more than $1 billion — year after year.

These things, though, take time — which means we have to act now. Sadly, the mayor did not include “controlling” such costs on his menu of budget options for future years.

So what did the mayor include on his list of budget options? Besides $400 million in additional agency spending cuts starting in 2010, he proposed either a 7.5 percent or a 15 percent hike in the personal-income tax rate, starting just two months from now, on January 1, 2009, unless the budget situation improves soon. (It was unclear if the mayor meant to enact such a tax before January 1, or would seek to do so retroactively next summer.)

A 15 percent tax hike would push the current 3.65 percent rate up to 4.20 percent, close to the 4.25 and 4.45 percent levies temporarily enacted between 2002 and 2005.

But things were different then. Wall Street, after the cyclical slump, was still structurally growing; it treated the tax hikes as mere speed bumps. This time, a shrinking Wall Street will want to slash costs. Firms like Merrill Lynch, which are merging with out-of-state banks like Bank of America, will be tempted to move remaining jobs elsewhere; there is no reason to give them another push.

Plus, just one percent of the city population pays nearly half of local personal income taxes. These people have suffered severe decreases in their net worth over the past few months, and may be tempted to relocate elsewhere to avoid a higher tax burden on top of those losses.

Lastly, if New York hikes taxes, it will repel non-financial-industry businesses and individuals who might otherwise be attracted to the city in the coming years by lower commercial rents and residential real-estate prices. As E.J. has noted, New York’s personal-income tax helps to put the city’s combined city-state tax burden at the top of the heap nationwide.

There’s no reason to make it worse, especially when we can avoid doing so if we act now.