In just a few days, North Carolina voters will elect a new governor, lieutenant governor, and perhaps a dozen or more new members to the General Assembly.    

    I wonder how many will, on second thought, decline the honor. The coming legislative session in 2009 isn’t going to be pleasant. The economic downturn could well persist far into next year, with the jobless rate reaching as high as 8 percent and many North Carolinians experiencing weak or nonexistent income growth. Among other adverse effects, economic downturns do a double-whammy on the state budget — boosting demand for public assistance while slashing revenue collections.  {mosimage}   

    According to the latest estimates from the legislative staff, the state received $230 million less than expected during the first quarter of the 2008-09 fiscal year. If the trend persists through June, that suggests the possibility that revenue collections will be more than $1 billion below projections (other quarters have bigger revenue numbers, so the same percentage drop would be worse).    

    Factor in the likely increase in Medicaid, other welfare spending tied to the business cycle and the need to plug a hole in the state employees health plan in the range of a quarter-billion dollars, and it isn’t hard to imagine a scenario in which North Carolina’s newly elected chief executive and legislative will be faced with a budget gap exceeding $1.5 billion.    

    That’s not the end of the story. Remember that North Carolina continues to grow, albeit not as rapidly as in the recent past. There’ll be plenty of demands on state coffers to fund enrollment increases in schools and colleges, staff new state prisons and facilities, and at least give state employees enough of a raise to partly offset inflation. Typically, these bread-and-butter expenditures total hundreds of millions of additional dollars.    

    Therefore, many longtime budget watchers think that the state’s fiscal deficit next year will approach if not exceed $2 billion, or roughly 10 percent of the state’s General Fund budget.    

    On the campaign trail, Beverly Perdue and Pat McCrory have both argued for more state spending on programs they consider high priorities (early childhood and higher education for Perdue, law enforcement and transportation for McCrory). It may be their sincere intention to launch new initiatives, but at least in the initial budget biennium, reality will intrude. Although the Easley administration has already begun to cut back, and the state has $800 million in its savings reserve, the magnitude of the state’s fiscal woes will likely overwhelm most other issues next year.        

    The next governor will need to propose a balanced budget that fulfills the state’s core responsibilities without making North Carolina’s economic problems worse. Right after the election, the political establishment in Raleigh will begin pressuring that incoming governor to do the “courageous” thing and raise taxes — again. It will take real courage to say no, to recognize that there will be no better time to make the tough decisions that past governors have side-stepped, to set firm spending priorities and make them stick.    

    There will be no better time to streamline North Carolina’s convoluted array of state departments and agencies, reduce bureaucracy, increase transparency and end the political patronage and pork-barrel spending that pad budgets and reduce efficiency. Both Perdue and McCrory have endorsed the idea of creating a committee of budget experts, inside and outside of government, to help identify such savings opportunities and sell the resulting package to key political constituencies and the general public.     

    That’s a good idea. It was a good idea years ago, when state lawmakers heard similar recommendations from blue-ribbon committees and then failed to act on most of them. In 2009, policymakers will need to demonstrate that they don’t just talk a good game when it comes to fiscal restraint but will actually go out on the field and score.    

    The downturn is affecting many states. They’ll be merging, pruning, and downsizing, too. Some will probably raise taxes. Unfortunately, when strong economic performance in recent years pushed North Carolina’s revenues up significantly, state leaders chose to spend the money on new and expanded programs — ratcheting up our long-term fiscal obligations while leaving our marginal tax rates relatively high. As a result, North Carolina has less room to maneuver. Only the deluded could believe that jacking up our income and sales tax rates further above those of our neighbors and regional competitions won’t have deleterious effects on entrepreneurial activity and job creation in North Carolina.    

    We’re about to discover just how far delusion pervades the political class in Raleigh. In the meantime, it might be a good idea to prepare some post-election letters of condolence — to the winners.

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