The budget outlook in Massachusetts is growing darker. Economic uncertainty, including the recent vote by the United Kingdom to leave the European Union is having a ripple effect on Beacon Hill.
The Baker administration is now projecting the state could face a shortfall of close to $1 billion in the budget for the fiscal year that starts Friday. Twice this month, the administration has been forced to lower the amount of tax revenue the state expects to collect in the next fiscal year based on actual tax collections falling short of expectations in the two previous months.
Although the state’s economy remains healthy, the problem is stock market volatility that has resulted in lower revenue from capital gains taxes. Gov. Charlie Baker, Monday, said the market turmoil is expected to continue and that has to be factored into the revenue estimate.
" We are making some assumptions for next year based on best guesses at this point in time with the notion that Brexit falls into the category of an unknown at this point," said Baker.
Because the state must have a balanced budget, the spending plans for the next fiscal year passed by both the House and Senate must be revised to match the changed revenue projections. Baker said last week his administration is working closely with a conference committee of legislators that is working to produce the next state budget.
" Remember, it is a $40 billion budget. We are going to be solving for roughly $500 million. It is one percent of the budget. We should be able to do it," said Baker.
State Rep. Stephen Kulik of Worthington is a member of the budget-writing conference committee. He said rather than having about $1.1 billion more to spend in the next fiscal year, the state government will be level-funded with this year’s $38.9 billion budget.
" We can pretty much say with certainty there will be cuts in the budget from what was passed in the House and Senate and we are going to have to come out with a balanced budget from conference committee as soon as we can," said Kulik.
Although the new fiscal year starts Friday, that is not the deadline to deliver the next budget. Baker Monday signed a $5.3 billion 30-day temporary budget.
Legislators may have some breathing room on the time it takes to deliver a balanced budget, but they don’t have a lot of options to get spending and revenue in line. Kulik said about two-thirds of the budget is non-discretionary spending including pensions, debt service, and Medicaid.
" We don't see a scenario where there will be any tax increases or major new revenue initiatives to deal with this. We are going to live within our means and deal with it as a spending problem," said Kulik.
One option to help close the budget gap is the state’s so-called “rainy day fund.” The stabilization fund has $1.2 billion.
Fiscal watchdogs, including Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, have cautioned against raiding the rainy day fund when the state’s economy is not in recession.
"Clearly there are signs there could be some slowdown. We want to heed those signs. It becomes more challenging when you don't have a cushion in the stabilization fund that you can draw on in challenging times," said McAnneny.
One likely casualty of the budget shortfall is the August sales tax holiday. The legislature appears unlikely to authorize it given that it would cost the state approximately $25 million in lost revenue.