A fresh University of Connecticut study says that without major government cuts, it expects a modest recovery in the state’s economy and employment, but reductions to close a budget gap could undermine economic growth, The Associated Press reports.
The impact of a $2 billion cut in state spending would deliver only about three-fourths of spending cuts policy makers want because welfare payments would rise and the tax base would be eroded, according to the November Connecticut Economic Outlook released Thursday.
However, these negative impacts could be offset with tax reform, selective spending cuts, use of bonding authority to encourage investment and incentives for firms to use research and development tax credits to make capital investments.
The report said these policies and initiatives would jump start a robust recovery and drive major job recovery in Connecticut.
The report, titled “A Very Deep Hole Indeed,” by Peter E. Gunther and Fred V. Carstensen calls for “smart efficiency-based” cuts, rather than across the board spending reductions, restructuring what they call a dysfunctional revenue base, providing stimulus with state bonding of capital projects and encouraging private sector investment and job creation.
Gunther and Carstensen said earlier this year that $1 billion in unused research and development tax credits could be used to stimulate private investment and accelerate construction and permanent hiring.
A budget framework presented to Gov.-elect Dan Malloy’s chief of staff in a meeting with Gov. M. Jodi Rell’s budget officials shows that the new budget year that begins July 1 is forecast to be $3.44 billion in deficit. The report warns that the slow pace of Connecticut’s economic recovery is not expected to help bridge that gap and calls the fiscal decisions facing the state “daunting.”
The University of Connecticut report offers a bleak assessment of Connecticut’s budget troubles. Cutting the budget by $2 billion without offsetting policies and actions would overwhelm private sector job growth, significantly raise the unemployment rate, reduce state revenue while increasing public sector costs and eventually lead to falling population, the report said.
Falling population would further undermine an already weak housing sector.
“Thus, cutting state spending by itself would unleash a negative feedback loop that would partially nullify the cut in expenditures, damage Connecticut’s economic health and make recovery even more elusive,” Gunther and Carstensen said.
