As the economy slows, we’ve warned of the importance of fiscal caution and budget sustainability. A recent report from Pew examines the ability of state budgets to handle a recession. We’re indebted to the Washington Research Council for using the Pew lens to consider our state’s fiscal situation.
WRC analyst Emily Makings writes,
The [Pew] story notes that nationally, state “rainy day fund balances have never been higher.” That’s certainly true in Washington.
She includes this graph:
Earlier this year, the Volcker Alliance gave Washington an ‘A’ grade for our state’s rainy day fund policies.
We recommend reading the WRC post. Makings reports Pew identifies three potentially worrisome trends.
These trends are:
- Growth of fixed costs, which reduces budget flexibility.
- Spending cuts may be more difficult if spending is not back to pre-Great Recession levels.
- Recent revenue increases have been volatile.
The WRC finds that Washington is in better shape than most on all three, adding,
So long as Washington avoids adopting a capital gains tax, our tax structure is relatively stable. This means that we don’t need as high a level of reserves as many other states need to combat volatility.
This seems like a good time to plug an earlier WRC report that concluded Washington’s budget sustainability policies “work when followed.” The sustainability of the state budget is apt to be tested in the coming months. Although Washington may be in better shape than most states – possibly a weak reference point – we continue to warn of the dangers of overreach at a time of significant economic uncertainty.