Those tasked with estimating state budgets and federal deficits are coming under fire after many of their predictions have proved grossly inaccurate over the last several months. And while much of the blame is coming from politicians hoping to deflect criticism away from themselves, the numbers do provide a glimpse at how rarely forecasters predict the economy falling of a cliff and the ramifications for those elected to deal with the dwindling numbers.
Montana Gov. Brian Schweitzer last month railed against the state Legislative Fiscal Division’s budget estimates, saying, “not only have they never been right since I’ve been governor, they’ve never been so wrong for so long.”
It’s a tricky business estimating the economic fortunes of the state and, while I certainly believe the legislative staff is making its best efforts, the predictions are rarely accurate. To back up this point, the governor distributed a sheet to Helena reporters that showed, on average, the Legislative Fiscal Division year-end balance projections have been off by an average $308 million at the end of the two-year budget periods in 2005, 2007 and 2009.
Schweitzer’s numbers show that the legislative staff has chronically under-projected the ending fund balance the last six years, especially in 2005, when it predicted that two years later the state would have $76 million in its coffers. When 2007 came around, the actual balance was $549 million.
Of course, it’s prudent to be cautious when making predictions about what the state’s savings may look like. It also should be taken into account that the early- and mid-2000s were Montana’s boom years, when real estate prices ballooned, construction projects were dependable and almost everyone who wanted a job could find one. But the economy has since tanked, along with tax revenue. And Schweitzer now finds himself staring down rapidly deteriorating budget numbers.
In June 2009, just weeks after the state Legislature adjourned, the Legislative Fiscal Division projected that when lawmakers convened again in two years the state budget would still have a $282 million surplus. Since then, the legislative staff’s predictions have dropped dramatically and it expects all that money, and more, to be eaten up by the Great Recession. And now the governor is left to make the unpopular decision of cutting services to keep the state budget in the black.
On the federal level, the government hasn’t had a surplus since 2001 and it is now forecasting to run a mind-boggling $1.56 trillion budget deficit in 2010 – hoping to cut it in half by 2014. But over the last 30 years, budget deficit forecasts have been overly optimistic 80 percent of the time, according to numbers from the Office of Management and Budget.
As the New York Times points out: “The early (President) Clinton budgets – which failed to predict the surpluses that were generated, in part, by a stock market bubble – are the only major exception.”
It’s hard to blame economic forecasters working with data to extend current trends that don’t factor in a financial crisis or a real estate bubble or both. As the Washington Post’s Ezra Klein said: “If they knew the crash was coming, they’d be making money betting against the market, not running budget models.”
But the predictions are important because they are very public and what governing bodies must rely on when deciding how tax dollars will be spent – particularly in Montana, where lawmakers must plan two years ahead. And when those forecasts begin to fall, backing politicians into a corner by “unexpected” shortfalls, I’m surprised more of them don’t take Schweitzer’s position, who points out that rapidly changing budget numbers are the only thing to expect.