At a Crain’s breakfast this morning, City Comptroller (and 2009 mayoral candidate) Bill Thompson acknowledged a vital truth. “Budget growth has lately been out of balance with the growth of our local economy. Had we started to tie city spending to [gross city product] growth 10 years ago, my office estimates that the city would have spent roughly $8.5 billion less last year.”

It’s not a good idea to tie spending to gross city product, a highly volatile measure that, on average during the Bloomberg era, has exceeded inflation by about 2 percentage points.

However, Thompson’s basic point seems to be that New York City spends way too much money — more than 10 percent too much annually, in fact, on a $60 billion budget. He’s certainly right. During the Bloomberg era, city-funded spending has far eclipsed inflation, as the below graph shows.

10_21_fw-400x140-9578559
NYC inflation-adjusted spending, 1984 – present

It would be nice to hear the comptroller pledge, if elected mayor, to keep future spending to inflation and population growth.

But how to do that?

Practically speaking, the only way to do it is to start reforming the long-term structural problems in the budget: public-sector pensions and health benefits, Medicaid, and debt service, all of which now account for 40 percent of spending.

Even modest state-city reforms here — like asking all public employees to pay just 10 percent of their health-care premiums, increasing retirement ages for new public employees, or paring just 10 percent from bloated, patronage-rich, inefficient Medicaid costs — would save hundreds of millions of dollars a year, every year, starting in just a few years.

While Thompson did say that he wants to “continue to work in collaboration with our partners in the labor movement to achieve greater productivity gains,” he did not mention these specific costs or goals.

Further, Thompson acknowledged that “while the financial industry will always be a critical part of our city’s growth and prosperity, we are experiencing a seismic shift in our local economy.” It’s good to hear that Thompson does not think Wall Street’s turmoil is a short-term cyclical blip. Recognizing the scope of the problem — that the financial industry may shrink indefinitely — is the first step to solving it.

Thompson rightly notes that New York’s economy must diversify.

But it would be wonderful to hear an elected city official acknowledge that the private-sector economy can’t diversify because business and income taxes in both the city and state are just too darned high, the highest in the nation and in the region.

Start-up firms, small firms, and even big firms in industries that don’t make billions of dollars making up pretend mortgage-backed securities simply can’t afford to locate here.

Thompson should acknowledge that cutting taxes across the board — or, at the very least in this fiscal crisis, not raising them — would go a long way to attract non-financial firms and people. New businesses may already be attracted in the coming years by falling residential and commercial real-estate prices, and lower taxes would be a strong signal that we want them.

Thompson could also apply such broad-based cuts to the 4 percent unincorporated business tax (UBT), which he flagged in his speech, correctly, as confusing and too far-reaching. This tax, as Thompson noted, falls on independent workers and small firms, which could be the future of New York as we move away from huge investment banks.

Still, though, Thompson’s comment about “excess spending” was a breakthrough, and something almost never, if ever, heard from elected officials in New York City. And as the comptroller’s only mention of a tax was to criticize one — the UBT — the speech was an improvement over City Council Speaker Chris Quinn’s recent remarks.

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