By NICK GOSNELL
Hutch Post
HUTCHINSON, Kan. — The economic effects from COVID-19 are on track to send state government into severe fiscal trouble. An economist with the Sandlian Center for Entrepreneurial Government at the Kansas Policy Institute believes the picture is much more bleak than a consensus group of state forecasters has given thus far.
"Despite state forecasters guessing a 7.4% drop this year, that's from 2019 to 2020, the economic impact of COVID-19 and the government responses to it, I personally think could cause state revenues to fall by 18%, or even as high as a 46% drop instead," said economist Michael Austin.
Consensus for the U.S. second quarter of 2020 economic impact ranges from Goldman Sachs with a -7% hit, to Morgan Stanley’s -9.4% impact, to the Federal Reserve Bank of St. Louis’s predicting a whopping 18.9% contraction.
"The information that we all got about crude oil prices tanking, that was not configured into the CRE's estimate at all," Austin said. "They predicted roughly a 2% drop in severance taxes. Those are taxes on the production and drilling of crude oil. They predicted just a 2% drop in tax revenue. Yet, considering the news of this past week, I don't think it's reasonable to expect a 2% drop at all for the state fiscal house."
It's not that the state budget won't need to be cut, but how draconian those cuts must be, is the larger question.
"If the state fiscal house is going to plummet completely out of expectations, then that actually would lead to a worse scenario, in terms of which services to cut," said Austin. "Now, you're forced to make it, as opposed to today, where you can have a little bit of time and make some sort of prepared response."
Not that there's ever a good time for a crisis of this nature, but if policymakers choose to come back and do the hard work of making cuts before fiscal 2021 starts, they'll get much more control over the process than if they wait for the state to be broke and leave allotments to Governor Kelly to do.