If the Congressional Budget Office (CBO) is right, Governor David Paterson’s economic and fiscal projections for New York State are not gloomy enough.  The CBO expects higher unemployment and a somewhat slower recovery than Paterson’s budget has projected over the next few years, which means the revenue estimates in Paterson’s budget are still too high.

For example, Paterson’s Executive Budget forecasts that national Gross Domestic Product (GDP) will increase by 0.8 percent in current-dollar terms next year.  But the CBO’s recently updated economic outlook predicts constant-dollar GDP will shrink by 0.4 percent in 2009.

Congress’ budgeting agency predicts an unemployment rate of 8.3 percent for 2009.  Paterson’s budget predicts national unemployment of 7.6 percent.

On inflation, CBO forecasts the consumer price index will rise by just 0.1 percent, which verges on outright deflation.  Paterson’s budget forecasts a CPI increase of 1.4 percent.  (Inflation of just 0.1 percent would mean that Paterson’s proposed budget—the one Albany interest groups are treating as savage and draconian—actually represents a spending increase even in real terms.)

In the longer term, the CBO forecasts GDP growth of 14.4 percent from 2010 through 2012, while Paterson’s budget predicts economic growth at a slightly stronger 15.2 percent clip for the same period.   Compared to the governor’s budget, the CBO also forecasts somewhat higher unemployment and lower inflation lingering through 2012.

What impact would the CBO’s gloomier forecast have on New York State’s financial plan for fiscal year 2009-10?  Paterson’s Executive Budget provides the answer (on page 159 of the “Economic and Revenue Outlook” volume):

Should GDP growth for 2009 be weaker than projected, small business and farm income and partnership and S corporation income could also be lower than expected. Statistical evidence suggests that a one percentage point reduction in GDP growth translates into a decline in NYSAGI [New York State Adjusted Gross Income] of about $1 billion and a decline in personal income tax liability of about $50 million.

Using that ratio, the CBO forecast would indicate the state’s NYSAGI estimate should be lowered by $1.2 billion, and the tax liability estimate should be reduced $60 million.

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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