Wednesday’s state revenue forecast added $861 million to expected tax collections through the 2019-2021 biennium, more than enough to allow the state to meet current obligations without new taxes. Yet, in an uncertain economy, good news can quickly be eclipsed by a bleaker prognosis.
For example, the Washington State Wire reported Wednesday,
As further relief to consumers and legislators alike, [Chief Economist and Executive Director of the Economic and Revenue Forecast Council] Steve ]Lerch pointed out that, though it is inching downward, the yield curve, a heralded precursor of recession, is not yet inverted.
Oops.
Today, this Associated Press headline: Potential recession signal: A key ‘yield curve’ has inverted
The signal lies within the bond market, through which investors show how confident they are about the economy by their level of demand for U.S. government bonds.
It’s called the “yield curve,” and a significant part of it flipped Friday for the first time since before the Great Recession: A Treasury bill that matures in three months is yielding 2.46 percent — 0.03 percentage points more than the yield on a Treasury that matures in 10 years.
Short-term government fixed income yields are now ahead of the longer part of the curve, delivering a strong recession indication that hasn’t happened since 2007.
The spread, or yield curve, between the 3-month and 10-year Treasury notes just broke the longest streak ever of being above 10 basis points, or 0.1 percentage point. The two maturities were last below that level in September 2007, a run of 3,009 trading days, according to Bespoke Investment Group.
As we wrote earlier, the forecast did acknowledge a slowing economy and maintained an elevated risk for its pessimistic forecast alternative.
Meanwhile, partisan perceptions of the state’s fiscal position remain fixed. The Spokesman-Review reports,
Legislators disagreed, however, on what exactly that good news is.
For Democrats, it means the tax increases they will propose next week with their 2019-21 state operating budget will be smaller. Even with the $850 million extra revenue projected Wednesday – which would give the state about $5.1 billion more than it will spend in the current two-year budget – it’s not enough to cover the cost of inflation, higher salaries, the state’s extra obligations to public schools and needed improvements in special education, mental health, homelessness and opioid addiction, they said.
“This reduces our problem, but doesn’t eliminate it,” said House Appropriations Committee Chairman Timm Ormsby, D-Spokane, who is working on a 2019-21 budget proposal to be released Monday.
For Republicans, it means tax increases should be off the table and the Legislature should be able to cover existing and new expenses with the money economists expect to come in. Maybe the state could even cut taxes somewhere, they said.
The state’s financesare in the best shape in a decade, since before the recession, said Sen. John Braun of Centralia, the top Republican on the Senate Ways and Means Committee. “I see no reason why we would need new taxes,” he said.
That’s likely to be the debate that will play out over the next six weeks as legislators try to develop a budget that will cover the two-year cycle and balance, at least on paper, over four years.
Right. With Democrats enjoying solid majority margins in both the House and Senate, it will be interesting to watch the debate. More coverage in The Lens.
