Report: Closing state deficits with spending cuts alone could spark another recession

Balancing the next state budget exclusively with spending cuts could be the final straw that breaks Connecticut's economic back, pushing it back into recession, the University of Connecticut's economic think-tank warned Wednesday.

The Connecticut Center for Economic Analysis also said that such a move could trigger as many as 25,000 annual job losses between the public and private sectors combined.

"The Connecticut economy is in trouble -- deep trouble," center economists wrote in a report titled, "Averting the Doldrums: Will Connecticut Avoid Recession?"

"If people see the state is not going to sustain key initiatives, then the private sector is going to respond," Prof. Fred Carstensen, the center's director, said. "People need to understand that there is a profound connection."

Gov. Dannel P. Malloy's administration has made important strides to reverse more than two decades of almost nonexistent job growth, Carstensen said, citing investments in manufacturing, biosciences, financial services, and cutting-edge information technology.

And though Malloy hasn't proposed any major cutbacks in these areas to help close the $365 million shortfall his administration projects for the current state budget, the governor has imposed or sought reductions on marketing and tourism, worker training, and public colleges and universities.

Carstensen also said that spending cuts across dozens of state agencies not only impact state workers, but also hundreds of Connecticut companies that sell equipment, other goods and professional services to the public sector.

"That will, of course, ripple out," he said. "All of those people whose jobs are lost, or whose incomes are reduced, are going to spend less on groceries or cars or whatever."

More importantly, Carstensen added, though Malloy has refused to rule out tax hikes to close the much larger, $1.2 billion gap projected for the fiscal year that begins July 1, 2013, closing that potential deficit solely with spending cuts would undermine an economy that was wounded in the last recession far more deeply than most realize.

Momentum at risk

"A certain amount of cuts, I think, is going to be unavoidable," the UConn economist said. "But it is extremely important that we do not lose the momentum we have begun to develop."

"We have been saying all along that Connecticut has been caught in the sluggish national economy, as have many of our neighboring states," Gian-Carl Casa, spokesman for Malloy's budget office, said. "In such an environment, every approach has potential, unanticipated problems. The governor has been clear that we will live within our means and that he does not intend to raise taxes."

The Democratic governor has been a frequent target of Republican legislators' criticism over $1.5 billion in new state taxes ordered to help balance Malloy's first budget in the 2011-12 fiscal year. When Malloy took office in January 2011, nonpartisan fiscal analysts were projecting that the new governor had inherited a record-setting mess. A $3.67 billion shortfall, equal to nearly one-fifth of the state's operating budget, was built into 2011-12 finances, analysts estimated.

Malloy and legislators closed that gap not only with taxes, but with more than $1 billion in cuts to the spending level needed to maintain current services. And Carstensen said past contractions in spending, coupled with a new outlook on the last recession, only further demonstrates the need to limit spending cuts this time around.

Citing new federal data, the UConn center reported back in August that Connecticut's economy was damaged in the last recession more severely than most economists originally thought.

Carstensen warned at that time that the state could see little or no net job growth through the end of 2014.

Many economists say the last economic downturn, which became known as the Great Recession, began nationally in December 2007 and ended by July 2009. In Connecticut, which tends to both enter and leave economic downswings later than the national average, the recession generally is charted between March 2008 and the first few months of 2010.

Numbers sharply lower

But the UConn center noted that the National Bureau of Economic Analysis recently "sharply lowered" its seasonally adjusted numbers for Connecticut for 2006 through 2010.

The low point, which came in the fourth quarter of 2009, was supposed to be a GDP of $204.5 billion. But new data show the state's rock bottom of economic output was actually about 7 percent lower, coming in just above $190 billion.

Based on the national bureau's numbers, Connecticut fell into the Great Recession as early as the third quarter of 2007.

And the lingering effects of that deep recession still can be felt.

"While both the nation and the state appeared to be moving together until mid-2011, national recovery has continued while the state's recovery has flat-lined," the report states.

The latest report from the center now estimates the state's real gross domestic product, the combined value of all goods and services produced, adjusted for inflation, is about 1 percent, about half of the national growth rate.

It also projects the state's real GDP will grow at a modest 1.44 percent next year and by 2.24 percent in 2014.

Further complicating matters, what employment growth the Nutmeg State has enjoyed has been concentrated in lower-paying service industries.

Not all economic information is bleak, though. The center reports that new housing permits were up 56 percent in the first three quarters of 2012 compared with 2011. They still remain well below the high rates of a decade ago and alone are "an insufficient basis for a recovery," the report adds.

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