Sununu’s budget proposal suggests that fears of harsh recession are easing
Outlook is shifting on concerns about economy’s resilience
When Gov. Chris Sununu held budget hearings back in November, he gave his commissioners a warning: Prepare for an economic downturn.
“There’s really no way to avoid some form of a national recession,” Sununu said at the time. “It is real. It is coming.”
Three months later, the outlook of the governor – and many economists – has shifted. The budget proposed to the Legislature by Sununu Tuesday is rooted in far less bleak predictions.
“I think we’re gonna have a stagnation,” Sununu said, looking ahead to the next two years. “I don’t know if we’re gonna have a booming recession.”
The attitude change reflects a broader shift in thinking about the national economy. As the Federal Reserve continued hiking up interest rates last year to combat inflation, many worried the higher borrowing costs were going to stifle growth and provoke a recession. Those fears have subsided somewhat as the economy shows resilience and the Fed begins to ease off the rate increases.
And in New Hampshire, the rosier outlook is translating into a more aggressive budget proposal from the governor than expected. Sununu’s proposed budget includes long-term increases to Medicaid rates, school funding, and state employee wages, spending that is only sustainable with reliable tax revenue.
“The governor’s budget proposal appears to forecast a slower economy but not necessarily a recession,” said Phil Sletten, research director at the NH Fiscal Policy Institute.
For his part, Sununu argues his budget is responsibly crafted.
The new predictions included in the budget suggest that the state’s business tax revenues will not significantly increase or decrease. Instead, the revenues are likely to slightly drop and then stay stable, Sununu told lawmakers Wednesday.
“We effectively are seeing that revenues are going to level out and even go down just a little bit,” Sununu said before the House Finance Committee, during an hour-long budget briefing. “So we’re trying to be conservative. … If things keep going up a little bit, because we are one of the strongest economies in the country and the recession doesn’t hit the country as hard, I think that will be phenomenal.”
Sununu noted that overall revenues exceeded state plans by 15.6 percent in state fiscal year 2022 and 21.2 percent so far in fiscal 2023. He said that that kind of aggressive influx would likely not be sustainable into the next two years, but that a leveling and slight decrease would likely happen instead.
Other tax revenues are also likely to remain stable, the governor’s budget suggests. Intake from the state’s rooms and meals tax – a key fiscal source – is projected to stay at the same relatively high levels that they reached after worries around Covid-19 subsided and residents returned to restaurants.
“The governor’s office is not projecting that there will be substantial growth, nor will there be a severe enough recession to impact revenues in a way that outpaces inflation, for example,” Sletten said.
Real estate transfer tax revenues are also assumed to stay largely the same. That would suggest that the surging housing market of the past three years will cool down and stabilize, but not necessarily fall, Sletten said.
More ‘baseline’ spending
Exactly how on the mark the governor’s predictions prove to be remains to be seen. Traditionally, the governor’s budget – due in February – and the House’s budget – due by April – include less reliable revenue figures because they must be finalized before tax day, on April 18. The Senate will have a more accurate picture of the state’s tax revenues when it takes over the budget in April and May.
Sununu’s proposed budget has more spending than the last budget passed in 2021. That’s been fueled by higher-than-expected revenues over the past two years, which have helped create a surplus.
But the surplus is also the result of other factors. A heavy infusion of federal relief money through the American Rescue Plan Act of 2021 and a few other congressional spending packages to address Covid-19 has infused hundreds of millions of dollars into the state’s economy and helped buoy other services.
“The extent to which those are included and incorporated in the state budget proposal as set forth by the governor will potentially substantially affect the total amount of spending in the state budget,” Sletten said.
Meanwhile, the state’s ongoing workforce shortage across departments and agencies has meant less spending on personnel, leaving departments with leftover funds.
Some Republican lawmakers appeared wary of the amount of spending in the governor’s proposal.
“I have constituents who are going to come to me and say this is a great budget, but I’m not seeing any bill-payers or spending reductions,” said Rep. Jess Edwards, an Auburn Republican, speaking to the governor Wednesday. “I’m seeing increases across the board.”
Drew Cline, president of the Josiah Bartlett Center for Public Policy, a fiscally conservative think tank, noted that the governor’s budget includes much more “baseline” spending than expected – spending on long-term expenses that won’t sunset quickly. But he said the state’s flush coffers could sustain that.
“It does seem like we have generated enough surplus revenues over the last decade to justify putting a little bit more of that into the baseline budget,” Cline said in an interview Tuesday.
Cline said past budgets have proven that the state’s revenue estimates have been responsible; taxes often deliver more than expected, he noted.
He pointed to three paths a governor and Legislature can take when the state surplus is high: They can spend the money, they can save the money, or they can give it back to taxpayers. Sununu’s budget, he said, attempts all three.
The new budget dedicates $180 million to the state’s “rainy day fund,” the account that acts as a bulwark for the state against future recessions or economic crises. It includes an elimination of the communications services tax, a 7 percent tax on phone calls that critics say targets lower-income residents. And it features plenty of new spending, from one-off spending such as a $50 million allocation to begin planning a new men’s prison to ongoing spending such as the state employee raises.
“It’s not saying ‘let’s take all this money, woohoo, we have $330 million, let’s just roll it all into permanent programs.’ That would have been pretty irresponsible.”
Still, Cline argued for restraint.
“You can make a case that that spending is justified, but you have to understand that that is going to increase ongoing spending, and that’ll have to be covered with future state revenues,” he said. “In the future, if we continue having these budget surpluses, you’re not going to be able to spend 70, 80 percent of surpluses going forward. Because some chunk of that is going to be eaten up by the baseline increases.”
Democrats and progressive advocacy groups, meanwhile, argue that Sununu’s budget should have used the surplus to do more to address the state’s other needs by including more investments in renewable energy, school funding, homeless services, and housing.
“Governor Sununu’s budget continues to give massive tax breaks to the wealthy and large corporations and downshift costs to cities and towns instead of helping hardworking Granite Staters deal with rising costs,” argued Craig Brown, executive director of Amplify NH, a left-leaning advocacy organization.
The budget moves next to the House Finance Committee, which will break into three divisions to focus on different portions.
This story was originally produced by the New Hampshire Bulletin, an independent local newsroom that allows NH Business Review and other outlets to republish its reporting.