From Foresight, Vol. 5, No. 1
published 1998
In the spring of 1996, the Kentucky Long-Term Policy Research Center released a report entitled $5.8 Billion and Change: An Exploration of the Long-Term Budgetary Impact of Trends Affecting the Commonwealth. In that report, we warned that over the long term, we expect the state's spending needs to rise faster than revenues. Those projections were based on what we called "business-as-usual" assumptions about population growth, income growth and inflation.
How are the assumptions underlying our projections holding up? First, the revenue side: General fund revenue was $5,385 million in 1996 and we projected it to be $5,306 million, an underestimate of 1.5 percent. The difference is due mainly to our underestimate of per capita personal income growth. We slightly overestimated Kentucky's population growth and the percent of total state income that would be claimed by the general fund.
On the other side of the ledger, actual general fund spending in fiscal year 1996 was $5,284 million and we projected that spending needs would have a price tag of $5,211 million, a difference of 1.4 percent. We do not characterize this as an underestimate, however, because we were not attempting to predict how much money policymakers would choose to spend. Rather, we were projecting the amount of money Kentucky would need to spend in order to maintain current levels of service. At any rate, on the whole it appears that the Commonwealth has adequate revenues to cover the needs of its citizens as well as it did in 1994.
Thus, despite the fact that our projections appear to be fairly accurate, some observers may believe that the overall conclusion of our report-that expenditure needs are rising faster than revenues-is mistaken, given the large budget surpluses the state is currently enjoying.
But it is important to keep in mind two facts: First, our projections cover eight years, not just two, and it is in the later years that we project budget problems. Second, our projections do not attempt to model economic cycles, with alternating periods of rapid and slow revenue growth. Instead, they find the underlying trend over the course of several years. Our aim is not to be accurate in any one year, as the budget planners strive to be, but to be accurate in our long-term assessment of trends affecting the budget.
The present period of low inflation and strong revenue growth provides our policymakers with great opportunities, but we urge them to keep a cautious eye on the fiscal future of the Commonwealth.