Is The Arizona Budget For FY 2021 Sustainable?

Short answer, no.

In February, when the AZ FY 2021 budget was hammered out, the nation was enjoying the fruits of the Trump booming economy with gross domestic product growth in the very comfortable 2.5% range and unemployment at the very desirable 3.5%. Most economists consider these rates to be the sweet spot of the economy. Substantial deviations from the ideal are considered to be either inflationary or recessionary, depending on the direction of the move.

It should also be pointed out that the rising tide we enjoyed lifted all boats. Low unemployment was not limited to white males. Women, blacks, and Hispanics were experiencing the lowest unemployment rates in decades.

Then COVID-19 happened, and the bottom fell out of the economy. By the end of the 2020 first quarter unemployment was up to 14.7%. The July figures show a modest recovery, but the unemployment  rate is still three times what it was February. The other key economic indicator, the gross domestic product (GDP) growth experienced a substantial decline to minus 5% during the first quarter of 2020. Then the GDP experienced a catastrophic decline of 32.9% in the second quarter. This should not be taken lightly, even though the mainstream news media has purposely ignored it.

If this trend continues, the ensuing depression will make the Great Depression look like a cake walk.

It didn’t have to be this way. The response to a serious medical issue did not have to result in the systematic tanking of the economy by executive edicts, aided and abated by willing accomplices in the news media. But regardless of whether or not the debacle had to happen, the fact is that it happened, and it will, or should, have a huge effect on the AZ FY2021 budget.

We were told that the FY2021 budget was a skinny budget, subject to some hefty fattening via a special session later in the year.

It is true that the new budget at $11.6 billion is lower than the FY2020 budget, which was $11.93 billion. This constitutes a 2.77% reduction from the previous budget. In order to accomplish this, some sectors had to be reduced. For example, both the general government and the natural resources experienced substantial cuts.

However, not every budget item experienced a reduction. Both Education and Health & Welfare enjoyed some substantial fattening within this skinny budget. In both cases the increase was in the neighborhood of 3%. Normally, this would be regarded as only a modest increase, but considering a string of increases in recent budgets, plus the fact that just about everyone else was cut, these are substantial increases.

Not only did Health & Welfare and Education experience growth in their respective appropriations, but they also had substantial increases in their share of the appropriations pie. Health and Welfare went from a 25.56% share in FY2020 to 28.19% in FY2021. Likewise, Education increased its share of the pie from 54.15% to 57.50%. This keeps education as the undisputed largest recipient of AZ tax dollars. In fact education’s share is more than twice that of the next largest recipient.

The question then becomes one of where we go from here. There has been a lot of talk, and some action, about the federal government injecting cash into states’ economies to cushion the effect of the recession, but this is a bad idea for two reasons.

First, any influx of federal cash would not fix the problem, only mask it.

Second, the federal government has no money to give unless it borrows it or prints it, both of which are terrible ideas for the long term health of the economy.

A much better alternative would be for state and local governments to stop their infatuation with the imposition of restrains on businesses and citizens, and allow them to decide what is best for them.

Whether we choose dependency on the feds or common sense lifting of restrictions, the damage has been so severe that it will take a long time before substantial improvements are seen.

This brings us back to the original question of whether the FY 2021 Arizona budget can be sustained, and it is obvious that it cannot. Therefore, the solution will entail some cutting of the so called skinny budget. But where does one cut? The obvious answer is that cutting the largest items will have the greatest effect. But education has become the third rail of AZ politics. Neither the governor nor the legislature is in favor of another Red for Ed tantrum. However, it could be that the citizenry has already had enough, and will support some common sense adjustment of the budget. It would not be wise to count on it, though.

Regardless of what happens, the one sure thing is that we are in for a self-inflicted rough ride for months to come.

To check the facts stated herein, readers may go to the original sources:

The AZ Joint Legislative Budget Committee https://www.azleg.gov/jlbc/gfhistoricalspending.pdf

The U. S. Bureau of Labor Statistics https://www.bls.gov/news.release/empsit.toc.htm

The U. S Bureau of Economic Analysis https://www.bea.gov/news/glance