Dennis Sheehan: A Better Budget Process for a Renewed Economy

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Rhode Island, like all states, faces a budget crisis of unprecedented dimensions. National GDP declined 5% in the first quarter and is forecast to decline by as much as 40% in the second quarter. Declines of this magnitude will produce massive budget deficits in the state budget as income and sales tax collections crater. The state could easily be looking at a billion-dollar deficit over fiscal years 2020 and 2021.

The first question we confront is how can we make the necessary cuts to the state budget? The governor’s budget documents amount to 1,200 pages, making it impossible for any one person to understand all the details and recommend sensible cuts. Perhaps more important than a list of budget cuts is a thoughtful process for budget reductions. As opposed to negotiated deals and hasty votes of approval by the General Assembly, the governor and the Assembly’s leadership should publicly announce their principles of state government and priorities for spending. Encourage public debate about those principles and priorities. Every budget is a compromise, but let’s make it a transparent and informed one.

Budget cuts will be painful. But they are certainly possible. Let’s look at our neighboring New England state of New Hampshire. In 2019, the last fiscal year, Rhode Island spent about $8,900 per person. In contrast, New Hampshire spent slightly more than half of that, $4,500 per person. Although factors like demographics affect budgets, they do not automatically imply we need to spend twice as much as a nearby state.

The second question is how can we encourage an economic recovery? The only path out of budget deficits this large is economic growth. We have to do all we can to get Rhode Island’s economy growing again. With the enormous uncertainty surrounding the effects of the virus, that will be difficult. According to the governor’s plans, businesses will reopen slowly and only under strict rules about social distancing. All large events are cancelled for the next several months. Even smaller gatherings will be restricted. So there will be no V-shaped recovery. Instead, the recovery will extend into 2021 or 2022.

So how can the state help? The mantra here should be reduce, reduce, reduce. Reduce the barriers to economic activity. Reduce taxes and fees. Reduce regulations. Reduce licensing. All of these raise the cost of doing business. As an example, the Department of State charges $150 for an initial business license and then an additional $450 in fees and corporate taxes every year. Why is this needed? Another example: The Institute for Justice, in its report License to Work, ranks Rhode Island as the 10th worst state for occupational licensing. We license 72 out of 102 lower-income occupations. There is very little evidence that such onerous licensing has large benefits, and it often hurts the most economically disadvantaged.

Once again, our neighbor to the north, New Hampshire, provides an eye-opening contrast to Rhode Island. Over the last 20 years, New Hampshire’s population has grown at an average annual rate of 0.6%, not large, but still twice Rhode Island’s annual rate of 0.3%. Their 2014–2018 labor force participation rate, at 68%, is four percentage points larger than ours; their 2017 number of employer establishments, at about 38,000, is 36% larger than ours. In 2019, New Hampshire issued about 4,700 building permits, which is — astonishingly — more than three times Rhode Island’s figure of about 1,400. To have any hope of emerging from this recession, we need a more dynamic economy. To borrow a phrase from Marc Andreessen, “It’s time to build!” Not just physical structures but new businesses, better schools, and flourishing communities.

We are victims of the coronavirus. But we are not helpless victims. With a reasoned approach to reducing the state budget and freeing businesses from unnecessary constraints, Rhode Island can recover from our virus-induced economic malady.

 

Dennis Sheehan, a Middletown resident, is an emeritus Professor of Finance at the Penn State University Smeal College of Business and an adjunct scholar at the RI Center for Freedom & Prosperity. The opinions expressed are his own.



  • Lou

    “Rhode Island can recover from our virus-induced economic malady”, yes we were flying so high before the virus…just ask the RICF&P.