Preparing for the next recession
What are New Hampshire’s options when the next downturn arrives?
The last time short-term interest rates yielded more than long-term was during the inauspicious year of 2007. Financial analysts everywhere are raising warnings. We should pay attention. And we should also try to figure out why New Hampshire was slowest to recover from the last recession, before the next one hits us.
During the years following 2007, the Legislature laid off state employees, cut pensions, halved the university’s budget, ate up the Rainy Day Fund and borrowed money. The first three of these actions were Hoover-esque belt-tightening. The latter two pushed money into action to help get the economy rolling again.
Belt-tightening kicks off a downward spiral. Layoffs increase unemployment costs. Layoffs and pension reductions both constrict the flow of revenues to local business. Dropping revenues force firms to lay off employees, raise the state’s unemployment costs again and reduce business tax revenues. What is the outcome? The budget deficit widens. More residents leave.
New Hampshire suffered all these consequences from our response to the last recession. In fact, the construction industry still has not recovered its workforce of a decade ago. And that shortage of construction workforce is one factor causing the housing shortage that underlies today’s workforce shortage.
The workforce gap was exacerbated even more by funding cuts to universities. Universities attract talent to states. By halving their budgets, the legislature forced universities to charge high tuition. New Hampshire students are now burdened with the highest debt loads. As a result, we lose a larger percentage of high-school grads than almost any other state, still, a decade later.
When another recession hits, there will be little pension or university funding left to cut and few staff to lay off. Prisons, law enforcement and other departments cannot fill the openings they have, so cutting existing salaries will not be an option. The Department of Education is so lean that they claim they no longer have the resources to assess school district quality; they now only perform safety inspections of schools. Health and Human Services’ caseloads are infamously high. Will we renege on the positions just funded? There seem to be few opportunities for payroll reductions.
“But why do we need to prepare?” some might ask. “The governor claims we have $250 million in surplus.”
But that money cannot be relied on in future budgets. According to the governor’s budget, $124 million derives from one-time repatriation and mergers. Conservative legislators would like to attribute the remaining surplus to business tax cuts. However, the Department of Revenue Administration refuses to verify this, probably because the cuts were de minimus. A business with $1 million in revenues, 25% profitability and $250,000 payroll only saved $60 from the cut.
A further cause for concern is the cyclical nature of our revenue streams. Business taxes sync with the macro economy, as do real estate, rooms and meals, and interest and dividends, meaning all our major revenue sources will drop simultaneously during a recession. Meanwhile, gasoline, tobacco, utilities and telecommunications revenues are on a permanent downward slope.
All these facts bode poorly for our ability to weather the next recession. We do have a good bond rating and Rainy Day balance. But one reason our bond rating is so high is because our wealthiest citizens pay very little in taxes. The potential to expand taxation is one of raters’ considerations.
When the next recession comes, will we use that ability? Will we ever expect top earners and valuable-property owners to pay their shares? Or will we try to Hoover our way through another recession?
Jeanne Dietsch of Peterborough represents District 9 in the New Hampshire Senate.