The state’s fiscal economist told House and Senate budget-writers Thursday that there is a 50-50 chance of a mild recession next year, and that tax collections are expected to decline slightly for the first quarter of fiscal 2020.
The comments by Jeffrey Dorfman, who also teaches applied economics at the University of Georgia, backed up Gov. Brian Kemp’s decision to force state agencies to cut their budgets for fiscal 2020, which ends June 30, and fiscal 2021.
“It is clear Governor Kemp’s approach to prepare for a tighter budgetary climate is a correct one,” Dorfman said.
The joint House and Senate hearings were scheduled after Kemp announced state agencies would be required to cut 4% from their budgets this fiscal year and 6% next year. Funding will be cut in some areas next week.
Many big areas of spending — k-12 schools, Medicaid and transportation — are exempt from the governor’s order, which aims to save about $200 million this year and $300 million next year. Kemp’s goal is to both prepare the state in case of an economic downturn and reallocate money so there is funding available for his priorities, including higher teacher pay.
Those cuts could require laying off staffers in state agencies, such as the Department of Natural Resources, the Georgia State Patrol and the GBI.
Many of the leaders of the budget-writing committees were around in the late 2000s, when the Great Recession hammered the state, leading to teachers and state workers being laid off and furloughed.
Senate Appropriations Chairman Jack Hill, R-Reidsville, said in recent years, revenue — mostly from income and sales taxes in Georgia — grew faster than in other states in the region because of the strong economy.
“Right now, we are at the bottom,” Hill said.
He said after the first two months of fiscal 2020, tax collections were $97 million below where they needed to be to pay for the state’s $27.5 billion budget.
“Right now, it’s really important to get our arms around where our economy is and where it’s headed,” Hill said.
Dorfman said revenue collections during the first quarter of fiscal 2020 were “disappointing” so far. Instead of rising 2% as originally hoped, Dorfman said collections are likely to be off slightly.
“Revenue is falling short of projections, which is definitely a reason for concern,” he said.
With fairly weak growth nationally, the state’s fiscal economist said negative shocks — political or economic — could send the economy into a recession, which some European countries are already experiencing.
Even if there is a “mild recession” next year, Dorfman said it won’t be anything like the Great Recession, when unemployment spiked dramatically and state revenue collections collapsed.
At least part of the revenue slowdown is due to the General Assembly’s decision in 2018 to cut the top state income tax rate from 6% to 5.75%. Lawmakers will decide in 2020 whether to lower it again to 5.5%, something tough to vote against in an election year. However, the tax cuts cost the state hundreds of millions of dollars each year in revenue.
John McKissick, an agriculture economist from UGA, said some parts of the state’s biggest industry — agriculture and related businesses — are hurting for a combination of reasons.
Hurricane Michael caused billions of dollars worth of damage and destroyed fruit and nut trees and other things that can't be easily replaced. Trade skirmishes have caused problems as well, since much of the state's production is exported.
“A lot of producers in good solid financial shape are now pushed more on the financial margins, where they have little leeway to move one way or another,” he said.
Prices for some commodities are at 10-year lows, and more farmers are going further into debt, he said. Farm labor is in short supply.
McKissick said the industry will see an inflow of federal aid at the end of 2019 and 2020, which should provide a boost.
One bright spot, he said, is Georgia’s massive poultry industry, which has had a good year in 2019 and he expects will do well again in 2020.
Even as lawmakers got mixed signs on the economy in Atlanta, Kemp continued his sunny economic messaging at a Kubota manufacturing plant and then a speech to the Greater Hall County Chamber of Commerce.
Kemp told the crowd that he doesn’t think “hard times” are coming, but that he’s got to prepare the state.
“After 30 years in the private sector and eight years running an executive branch agency, I know firsthand that when you have hard times it’s not the time to make cuts,” he said. “We’re going to get ahead of that.”
WHY IT MATTERS
Gov. Brian Kemp has called on state agencies to reduce spending by $500 million over the next year and a half. Kemp’s order does not apply to some expenditures, but most state agencies will start seeing their funds cut Oct. 1. After Kemp instructed agencies to prepare plans for reducing spending, the state House and Senate scheduled joint hearings that began Thursday.
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