While past crisis-era budget gaps were projected after an economic shock, the currently-projected gaps appear to reflect an expected downturn in the national economy as the Federal Reserve’s campaign of interest rate hikes dampens economic activity. If and when a recession might materialize, however, is far from clear, as FPI documented in a recent blog post.
Economic pessimism, however, is not entirely responsible for the projected budget gaps. Recently-projected budget gaps are attributable to downward revisions to revenue expectations. However, the State’s economic outlook does not appear to have been significantly downgraded in recent months. Further, the most recent economic data have exceeded the State’s forecasts. Rather, recently projected budget gaps appear largely based on weak April 2023 tax revenue. As FPI noted in its analysis of the fiscal year 2024 enacted budget financial plan, April’s low tax receipts were largely backward-looking, reflecting financial market conditions in 2022. Fiscal data from May through July have exceeded projections.
Because of the high uncertainty around the fiscal imbalance projected in this plan, New York lawmakers should avoid reactive policy responses and monitor fiscal and economic data as it arrives. Should a recession occur, the State should leverage the substantial fiscal reserves and avoid recession-exacerbating service cuts.