On January 15, 2020, the World Economic Forum – an international nonprofit organization that brings together thought leaders in government, nonprofits, and business – released its 2020 Global Risks Report. In it, they laid out several threats to world economic growth, ranking them on scales of likelihood and impact. Among the most pressing threats, those with high likelihood and impact, were climate change, extreme weather, biodiversity loss, natural disasters, cyberattacks, and manmade environmental disasters. Infectious diseases were ranked #10 on the list of strongest impacts but did not make the top 10 in terms as likelihood (World Economic Forum, 2020). This was shortly after the Congressional Budget Office had released its Economic and Fiscal Outlook, projecting GDP growth in 2020 of 2.2 percent with a projected unemployment rate averaging 3.5 percent over the year (Congressional Budget Office, 2020).
But a few months can certainly change outlooks. In the mere 110 days that have passed since the release of that report, almost 3.8 million people worldwide have tested positive for the coronavirus, about 1/3 of those in the United States. Almost 265,000 have died from the related COVID-19 illness, just under 73,000 in this country (Johns Hopkins University of Medicine, 2020). And the economic toll has been just as steep. First quarter 2020 real Gross Domestic Product, a measure of the output of America’s farms and factories, fell at an annualized rate of 4.8% (U.S. Bureau of Economic Analysis, 2020). The extent of the decline in economic activity in the first quarter was even more dramatic when one realizes that COVID cases only started growing rapidly here at the end of February, after almost two-thirds of the quarter was complete. Estimates for second quarter real GDP growth range from a decline of 18 percent to 35 percent (!), with the Blue-Chip Publishers survey of economist’s consensus figure of -28 percent (Federal Reserve Bank of Atlanta, 2020).
Labor Market Devasted.
The labor market has also been devastated. Since the week ending March 21, over 30 million Americans have filed for new unemployment claims (U.S. Department of Labor, 2020), 18.6 percent of the civilian labor force as of March (U.S. Bureau of Labor Statistics, 2020a). The “official” U-3 unemployment rate stands at 14.7 percent, but this likely underestimates the true extent of job losses as some people will drop out of the labor force in the face of coronavirus-related layoffs and thus won’t be counted as unemployed in the statistics. Better estimates of the true labor situation are the U-6 unemployment rate of 22.8 percent, which counts people who have stopped looking for work, and the civilian employment-to-population ratio of 51.7 percent, which looks at how many people are employed compared to the overall population, thus bypassing messy definitions of who is unemployed. The employment-to-population ratio is at the lowest level ever (the series goes back to 1948), over 4 percent lower than the previous low (Figure 1). Further, many of these lost jobs may not return quickly, with many forecasts indicating elevated levels of unemployment through mid-2022 (Zandi, deRitis and Sweet, 2020).
Figure 1. Civilian Employment-to-Population Ratio, 1948-Present.
The economic condition in Illinois is not markedly better. Since March, nearly 740,000 Illinoisans have filed for first-time unemployment claims, about 11.7 percent of the civilian labor force (U.S. Bureau of Labor Statistics, 2020b). The U-3 unemployment rate was at 4.6 percent as of
March (which will likely rise dramatically in April once the data is released on May 22), while the civilian employment-to-population ratio was 48.1 percent. While state GDP will not be released until July 7, four early indicators of economic activity are showing strong declines.
- First, the Philadelphia Federal Reserve Bank’s Coincident Economic Index for the state decreased by 1.28% from January to March. This was the largest decrease in the history of the index (going back to 1976) except for the depth of the 2007-09 Great Recession (Federal Reserve Bank of Philadelphia, 2020).
- Second, the Illinois component of the Midwest Economy Index, compiled by the Federal Reserve Bank of Chicago, decreased by 0.33 points in March, the largest decrease since 2008 (Federal Reserve Bank of Chicago, 2020).
- Third, seasonally adjusted state sales tax receipts fell by over 15 percent in April (which reflects March activity – Illinois Comptroller’s Office, 2020).
- Finally, the University of Illinois Flash Index, which uses data from sales, individual income, and corporate income taxes, fell to its lowest level ever in April (again reflecting March data), with data going back to 1981 (Giertz, 2020).
These economic woes have caused great harm to the finances of government at all levels. In a report to the state legislature and governor, we developed a model to project the loss of revenue in the “Big Three” revenue sources – individual income taxes, corporate income taxes, and sales taxes. We found that revenues from these sources could fall somewhere between $4.3 billion and $14.1 billion over the next two years, depending on the severity of the recession (Figure 2). In the same report, we discussed two sources of increased spending, for Medicaid expenditures and expenditures on health and welfare (Kass, Kriz and Merriman, 2020). The Governor’s Office of Management and Budget (2020) and the Commission on Government Forecasting and Accountability (2020) have also released estimates of revenue loss which are similar to the estimates in our report. Quite obviously, this will cause large deficits, estimated in the GOMB report as $6.2 billion in fiscal year 2021 if the graduated income tax proposal passes the referendum vote in the fall and $7.4 billion if it does not. To put this number into perspective, this is nearly 20 percent of total general fund revenues.
How Will Deficits Be Addressed?
The next question for public officials is how the deficits will be addressed. The GOMB release gives some hints for the state. The administration is proposing to close FY2020 revenue shortfalls mostly through borrowing, with about $725 million from internal sources (interfund transfers and deferral of repayment for previous interfund loans) and $1.2 billion in short-term external borrowing through tax and revenue anticipation notes. While the much larger FY2021 shortfall remains unaddressed, it is easy to see that much of it could be addressed through borrowing. Indeed, a recent comparative analysis of New York and Illinois state finances shows that Illinois has been running chronic operating budget deficits and systematically borrowing over the past several years to close them (Beckett-Camerata and Kriz, 2020 – although the state has a constitutional requirement to pass a balanced budget, it only applies to state General Funds and even then the actual fiscal year expenditures do not have to be covered by revenue but the state can use a variety of internal and external borrowing to cover shortfalls).
Figure 2. Revenue from "Big Three" State Revenue Sources, Calendar Years 2019-23, Various Scenarios.
Source: Kass, Kriz and Merriman, 2020.
In the IGPA paper mentioned earlier, we sketched out broad principles for addressing the likely revenue shortfalls. These include:
- Transparency;
- Protection of the vulnerable;
- Economic efficiency;
- Minimizing borrowing for operating purposes; and
- Flexibility (Kass, Kriz and Merriman, 2020).
- The first principle puts heavy weight on the disclosure of constraints and the reasons that choices are made. If budget cuts are necessary, the tradeoffs involved should be made clear.
- The second principle suggests that any cuts should fall less on those who are most vulnerable, given their increased risk of harm from the coronavirus and lower ability to withstand fluctuations in real income.
- The third principle states that budget changes (both tax increases and spending cuts) should be made with an eye toward minimizing the economic impact of the changes. One easy way to do this is to focus cuts on areas where the state is operating less efficiency. The paper mentioned earlier that reviews Illinois and New York financial condition details a promising methodology for accomplishing this (Beckett-Camerata and Kriz, 2020).
- It is clear from the GOMB report that the state may violate the fourth principle, through borrowing to support operating expenditures. The key then will become matching borrowing and spending timeframes – only borrowing in the short-term (less than one-year) to support operating expenditures.
- Finally, any budget changes should maximize flexibility of the government to adapt to changes in the economic and fiscal environment that are likely to arise.
Kenneth A. Kriz, Ph.D. is University Distinguished Professor of Public Administration at the University of Illinois at Springfield. Dr. Kriz conducts research focusing on subnational debt policy and administration, public pension fund management, government financial risk management, economic and revenue forecasting, and behavioral public finance.
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REFERENCES
Beckett-Camerata, J. and Kriz, A. 2020. New York and Illinois State Government Budgeting: Promising Practices in Response to the Coronavirus Pandemic Crisis. Unpublished manuscript.
Commission on Government Forecasting and Accountability. 2020. 3-Year Budget Forecast FY 2021 – FY 2023. Springfield, IL: Commission on Government Forecasting and Accountability.
Congressional Budget Office, 2020. The Budget and Economic Outlook: 2020 to 2030. Washington, DC: Congress of the United States, Congressional Budget Office.
Federal Reserve Bank of Atlanta, Center for Quantitative Economic Research. 2020. GDP Now. Available at https://www.frbatlanta.org/cqer/research/gdpnow . Accessed May 6, 2020.
Federal Reserve Bank of Chicago. 2020. Midwest Economy Index. Available at https://www.chicagofed.org/publications/mei/index . Accessed May 5, 2020.
Federal Reserve Bank of Philadelphia. 2020. State Coincident Indexes. Available at https://www.philadelphiafed.org/research-and-data/regional-economy/indexes/coincident . Accessed May 5, 2020.
Giertz, J.F. 2020. COVID-19 Pandemic Brings Flash Index Crashing Down from February High. Available at https://igpa.uillinois.edu/Report/flash-index-march-april2020 . Accessed May 6, 2020.
Illinois Governor’s Office of Management and Budget. 2020. April 2020 Revenue Forecast Revision. Springfield, IL: State of Illinois, Executive Office of the Governor, Governor’s Office of Management and Budget.
Illinois Comptroller’s Office. 2020. Total Revenues by Revenue Source: Sales Taxes, 2020. Available at https://illinoiscomptroller.gov/index.cfm/financial-data/state-revenues/by-revenue-source/?RevSel=0&RevGrpSel=06&RevClsSel=0&RevTypeSel=0&FY=20&GroupBy=None&ShowMo=Yes&GetQueryData=Search . Accessed May 5, 2020.
Kass, A., Kriz, K. and Merriman, D (Faculty & Staff Leads for Economic and Fiscal Health Impact Group, Task Force on the Impact of the COVID-19 Pandemic). 2020. What Policymakers Should Know About the Fiscal Impact of COVID-19 on Illinois. Urbana, IL: Institute of Government and Public Affairs, University of Illinois System.
Johns Hopkins University of Medicine. 2020. Coronavirus Resource Center. Available at https://coronavirus.jhu.edu/map.html . Accessed May 6, 2020.
U.S. Bureau of Economic Analysis. 2020. Gross Domestic Product, 1st Quarter 2020 (Advance Estimate). Available at https://www.bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-advance-estimate . Accessed April 29, 2020.
U.S. Bureau of Labor Statistics. 2020a. Employment Situation Summary. Available at https://www.bls.gov/news.release/empsit.nr0.htm . Accessed April 29, 2020.
U.S. Bureau of Labor Statistics. 2020b. State Employment and Unemployment Summary. Available at https://www.bls.gov/news.release/laus.nr0.htm . Accessed May 5, 2020.
U.S. Department of Labor, Employment and Training Administration. 2020. Unemployment Claims Weekly Claims Data. Available at https://oui.doleta.gov/unemploy/claims.asp . Accessed May 6, 2020.
World Economic Forum. 2020. The Global Risks Report 2020: 15th Edition. Geneva, Switzerland: World Economic Forum.
Zandi, M., deRitis, C. and Sweet, R. COVID-19 Q&A Update. Available at https://www.moodysanalytics.com/webinars-on-demand/2020/covid19-q-and-a-update . Accessed May 5, 2020.
