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2008-09 Enacted Budget and Economic Outlook May 15, 2008

2008-09 Enacted Budget and Economic Outlook May 15, 2008. Laura L. Anglin Director of the Budget. Presentation Overview. Economic Climate 2008-09 Enacted Budget Outlook for 2009-10. Recessionary Economic Climate. National Recession.

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2008-09 Enacted Budget and Economic Outlook May 15, 2008

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  1. 2008-09 Enacted Budget and Economic Outlook May 15, 2008 Laura L. Anglin Director of the Budget

  2. Presentation Overview • Economic Climate • 2008-09 Enacted Budget • Outlook for 2009-10

  3. Recessionary Economic Climate

  4. National Recession • Division of the Budget projects that the U.S. economy in now in a recession. • Substantial private sector job losses. • Household income and consumer spending are slowing considerably. • Corporate profits are falling, due largely to turmoil in financial market

  5. Concerns in the Job Market • Five straight months of declining private sector employment. Since December, U.S. has lost over 300,000 jobs. • Since the release of DOB’s 21-Day forecast, U.S. private sector employment has been revised downward for both December and January. • The labor market has never weakened to this extent during the postwar period without falling into recession.

  6. Housing Market Continues to Suffer Real Residential Investment Percent Change Note: Shaded areas represent US recessions. Source: Moody’s Economy.com; DOB staff estimates. • The housing sector is projected to contract through the end of 2008. • Recent declines in real residential investment resemble the severe recessions of 1973-75 and the early 1980s. • Average new home prices fell 8.9 percent during the first quarter of 2008, with declines expected to continue. • The commercial real estate sector is also experiencing a significant slowdown.

  7. Some Signs for Optimism • The Budget Division anticipates that the current recession will last eight months (Dec 2007 through July 2008) and result in an average monthly loss of 75,000 jobs. • Average postwar recession has lasted ten months with monthly loss of 154,000 jobs. • Aggressive monetary and fiscal policy (Fed 325 basis point cut, stimulus package) along with continued healthy demand for U.S. exports, will help to limit the severity of the current recession. • The U.S. economy, as measured by real GDP, is now expected to grow 1.1 percent during 2008. Never before has growth been as high as 1.1 percent during a recession.

  8. Problems on Wall Street

  9. Sub-prime Crisis on Wall Street • 20 percent of state revenue comes from Wall Street, which has been hit hard by the sub-prime crisis. • Over $200 billion in write downs at major financial firms. • Lending activity has slowed down and banks have tightened their lending standards.

  10. Financial and Insurance Sector Layoffs 2001 Recession • Industry layoffs to-date exceed 63,000. • DOB has lowered its forecast for finance and insurance sector employment for New York dramatically since the release of the 2008-09 Executive Budget. • Finance and insurance sector employment always experiences significant declines during recessions. 2008 Recession

  11. Wall Street Bonuses Percent Change • New York State finance and insurance sector bonuses are expected to fall 11.1 percent for SFY 2008-09, following a decline of 1.3 percent for 2007-08. This compares to growth of 25.3 percent in 2006-07. • Bonuses fell 30.2 percent in 2001-02 and another 14.4 percent in 2002-03. State Fiscal Year Ending Source: Moody’s Economy.com; DOB staff estimates.

  12. What Does This Mean for New York?

  13. New York Economic Outlook • New York State employment growth is projected to slow from 1.5 percent in 2007 to 0.1 percent for 2008. (Each percentage point increase adds about 80,000 jobs.) • State wage growth of 2.7 percent is projected for 2008, a significant slowdown from the 8.3 percent estimated for 2007. (Each percentage point increase adds about $5 billion to total wages.) • Capital gains realizations are projected to fall 15.7 percent for 2008, compared with growth of 14.7 percent for 2007. (Each percentage point decline is worth almost $1 billion in taxable income.)

  14. Effect of Recession on New York • New York has been especially hard hit by past recessions, compared to nation as a whole. • New York recessions are usually twice as long and have deeper job losses than the country overall. • Average length of last five US recessions: 11 months. • Average length of last five NYS recessions: 25 months.

  15. End of Extraordinary Revenue Growth All Funds Tax Receipt Base Growth 12.6% 11.4% 9.5% 6.0% 6.0% 2.5%

  16. End of Extraordinary Revenue Growth All Funds Personal Income Tax Base Growth 16.0% 15.5% 9.8% 8.9% 5.5% 3.9%

  17. End of Extraordinary Revenue Growth All Funds Business Tax Base Growth 23.1% 19.9% 9.3% -4.8% -1.4%

  18. End of Extraordinary Revenue Growth All Funds Sales Tax Base Growth 5.3% 5.0% 4.2% 2.8% 2.8%

  19. 2007-08 Declining Revenue Projections Projected 2007-08 General Fund Receipts (Billions) $41.8B Over $700 million in Downward Revisions $41.3B $41.3B $41.1B $41.1B

  20. 2008-09 Declining Revenue Projections Projected 2008-09 General Fund Receipts (Billions)* $43.2B $42.7B Over $1.7 billion in downward revenue revisions $42.3B $42.0B $41.5B *Excludes Changes to Law

  21. 2008-09 Enacted Budget

  22. Enacted Budget Overview • Balanced budget passed with minimal delay on April 9, 2008. • Spends less than Exec. Budget for first time in a decade • Closed $5.2 billion General Fund deficit without tapping rainy day reserves • Governor Paterson’s first act in office was to propose $800 million in across-the-board cuts, $710 million of which were implemented • Makes important investments in education, health care coverage and economic development

  23. 2008-09 Enacted Budget: Spending Estimates

  24. Spends Less than the Exec. Budget for First Time in a Decade 2008-09 State Operating Funds Spending (Billions) $81.6 B $80.9 B $80.5 B

  25. 2008-09 Budget Gap General Fund Deficit $5.2 B Legislative Initiatives $873M 2008-09 Budget Gap $6.1 B

  26. $6.1 billion Gap Closing Plan Labor Reserves $620 million Savings Actions $2.8 billion Revenue Actions $1.3 billion Non-recurring Actions $1.3 billion

  27. Major Policy Initiatives • K-12 Education: $1.8 billion school aid increase • Economic Development: $1.6 billion statewide economic development capital plan ($700 million Upstate Revitalization Fund) • Health Care: Provides access to coverage for all New York’s 400,000 uninsured children; begins reforming reimbursement system to invest in primary and preventative care; • Higher Education: Nearly $2.5 billion capital investment in SUNY and CUNY projects; authorizes creation of Endowment, but does not specify funding source.

  28. Outlook for 2009-10

  29. Spending Growth Outpacing Revenues Base Tax Growth v. Base Spending Growth 10.2% 8.7% BudgetGap BudgetGap 2.7% 4.6%

  30. Significant Out-year Budget Gaps Projected Out-year General Fund Deficits $8.8B $7.7B $5.0B

  31. Moving Forward • State spending is still growing at an unsustainable rate, even after recent cuts • Governor Paterson has pledged that next year will be much different when he delivers his first Executive Budget proposal • Recently called on state agencies to submit plans to achieve 3.35% spending reduction • Reevaluate their operations from top to bottom • Limit hiring to only job openings absolutely essential to their operations • Said these reductions are “only the beginning” • Convened a work group to examine root causes of spending growth

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