The booming stock market continues to bolster Connecticut's revenue.

A booming stock market continues to shield state government — if not the Connecticut economy — from the worst of the pandemic.

A consensus report Tuesday from two state agencies not only confirmed that surging tax revenues — tied largely to capital gains and other investments — will soften a big deficit this fiscal year, but they also will slash nearly $1.6 billion in red ink off the books over the next two.

Gov. Ned Lamont and the General Assembly still face a deficit exceeding $900 million this fiscal year and revenue gaps between $1.3 billion and $1.45 billion in each of the next two.

But when the pandemic was tearing through the state in late April, the Lamont administration was anticipating that this year’s deficit would be triple its current size and that revenue gaps in the next biennial budget would top $2 billion per year.

Connecticut has nearly $3.1 billion in its record-setting rainy day fund, and Lamont already has said publicly that he believes major tax hikes can be averted in the next two-year cycle.

Still, the administration downplayed Tuesday’s report, which was prepared by Lamont’s budget office and by the legislature’s nonpartisan Office of Fiscal Analysis, warning the public not to underestimate the coronavirus’ potential for causing economic chaos.

The forecast “demonstrates the delicate balance we are currently facing,” Lamont’s budget director, Melissa McCaw, wrote in a statement, “but there is uncertainty ahead as COVID-19 cases are rising.”

State analysts issued extremely gloomy revenue estimates back on April 30 but also warned they were somewhat unreliable. Lamont had deferred state income and other tax filing deadlines from April 15 to mid-July to assist struggling households, but that left analysts with minimal data to assess state finances.

Still, the administration warned five months ago that the fiscal year starting July 1 faced a projected, built-in hole of about $2.7 billion — a whopping gap equal to 13% of the entire General Fund.

By September analysts shrank the deficit to $2.1 billion and by late October it was below $1.3 billion.

Based on the revenue gains in Thursday’s report, the shortfall is under $950 million — still large, but more than manageable, given the $3.1 billion held in reserve.

Much of that improvement was driven by a subset of the state income tax — quarterly filings that are dominated by capital gains and other investment-related earnings.

The Dow Jones Industrial Average closed Tuesday at 29,421 points, almost 9% higher than it was on March 4, just before it began a pandemic-induced plunge that eliminated one-third of its value.

Analysts also had been much more dire last spring in their warnings about the 2021-22 and 2022-23 fiscal years. They specifically projected revenues would fall short of pre-pandemic levels by more than $2 billion per year.

But the gaps reported Tuesday were $875 million for 2021-22 and $705 million for the year after that.

McCaw noted that Connecticut’s federal pandemic relief is nearly exhausted, a third round of aid from Congress is long overdue and COVID-19 cases, both here and nationally, are on the rise.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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