William Larsen

What constitutes a Budget Surplus?

Governor Danials used the phrase “We Balanced Indiana’s Budget” many times. However, is this a true statement? The Unemployment fund was rich in cash five years ago, but after increasing the benefit in1993 without increasing the tax, the fund is now exhausted and we have borrowed $45 million from the U.S. Treasury at 4.5%. Indiana most likely see an escalation in borrowing since unemployment is rising, employment is decreasing and benefit duration is increasing.

A balance budget is simply not one year, but spans a number of years. During the good years, you do not cut taxes, but store the surplus for when the economy drowns as is the case now. Last summer Danials was proposing a 15% rainy day fund. I said 15% was way too low! During a down turn such as now, sale tax revenues drop (that was the reason for property tax revenues), employment taxes decrease due to increased unemployment, income tax revenues drop because wages stagnate and workers are laid off and service costs increase. Instead of 15%, how about a 100% surplus! You could see revenues drop by 30% to 40% in a recession and take 18 months to begin to recover. The problem with the Danials “business” plan is that it relies on good times and does not factor in bad times.

In summary a balanced budget in my opinion is accomplishes one thing. During good times you run a hefty surplus so that during bad times you can continue services without raising taxes. When the economy finally improves your reserve is near zero and you build it back up during the good times.

posted by William Larsen @ 11:13 PM