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Deflation like great depression { June 20 2003 } Original Source Link: (May no longer be active)
http://seattlepi.nwsource.com/local/127528_revenue20.htmlhttp://seattlepi.nwsource.com/local/127528_revenue20.html
Friday, June 20, 2003
Economic dark cloud lingers over Washington
State's top expert delivers another grim report, raises deflation specter
By ANGELA GALLOWAY
SEATTLE POST-INTELLIGENCER CAPITOL CORRESPONDENT
OLYMPIA -- Washington's weak economy has again hit historic lows and shows no signs of improving any time soon, the state's chief economist reported yesterday.
"On top of that, we are facing a very serious threat of deflation," Chang Mook Sohn told the bipartisan Revenue Forecast Council.
Employment won't likely rebound to its 2000 peak until spring 2005, which would be an 18-quarter recovery, the slowest in state history, he said.
And the recession dragged Washington's tax-collection projections down an additional $157 million yesterday. State legislators anticipated such a drop in their recently approved state budget -- and a federal bailout will help keep the state afloat. For now.
Washington's economy will remain flat this year and will see "very mild" improvement next year, although no significant upsurges in employment or other factors are expected, Sohn said.
"We are not going to see that for some time," Sohn said. He later added, "The Seattle economy is still the weakest in the state."
Sohn said the state faces a 20 percent to 25 percent probability of deflation, which is a generalized drop in the price of goods and services. The short-term effect is increased buying power. But prolonged deflation could cripple the economy further, leading to additional layoffs and reduced state revenue.
Washington has not seen deflation in nearly five decades. The last period of prolonged deflation was the Great Depression.
There were few bright spots in the forecast report, which has become a quarterly gloom-fest in recent years.
Sohn predicted that the multibillion-dollar construction and transportation improvement budgets that lawmakers approved are important economic stimuli. And ports and agriculture have seen some economic improvements, he said.
Yesterday's forecast projects that Washington will collect $157 million less than lawmakers anticipated in the no-new-taxes $23 billion operating budget they passed this month. The two-year budget cycle begins July1.
Sohn said there were several reasons for the drop from the March projections:
The national economic outlook "since March has been considerably worsened," Sohn said.
Actual state employment figures are lower than previously projected.
State tax collections have not picked up significantly from last year's "very depressed" level.
Layoffs in aerospace, mostly by The Boeing Co., have outstripped even grim expectations. In March, the state expected about 6,000 layoffs this year. Now, officials are bracing for nearly 9,000 cuts.
Lawmakers cut more than $2 billion in spending to fill a $2.7 billion shortfall this year. Another revenue drop in the September forecast, increased demand for state services or other bad news like yesterday's could force legislators to trim that budget further or raise taxes when they return for the next legislative session in January.
But lawmakers had expected yesterday's forecast to drop significantly. That was one reason they left $300 million in state reserves. Also, the revenue forecast does not factor in $400 million in one-time federal aid for the two-year cycle. Nor does it include a $446 million projected boost to state coffers over the next year, because of legislation passed this year.
"The sky isn't falling," said Senate Budget Chairman Dino Rossi, R-Sammamish, a member of the Revenue Forecast Council. "The good news is that we're not free-falling. The bad news is that the economy is flat and the recovery is moving slowly."
State budget director Marty Brown said increased demand for state services may be on the horizon as well. "We'll just have to work with what we've got and manage the budget," Brown said. "Obviously, it was a very wise move in budget negotiations to set aside at least $300 million."
One reason some GOP lawmakers wanted that money left on the table, however, was so they could push next year to extend targeted business tax breaks that are set to expire. They hadn't given up hope on that yesterday, despite increased demand for the reserves in general operations.
"We've got to find a way for all of us to come together and make sure these tax exemptions are continued," said Kent Republican Rep. Jack Cairnes, also a council member. Cairnes said the struggling economy only increases the need for such tax breaks, like the ones lawmakers conditionally gave Boeing this year. "We need to make sure we do those same things for other businesses."
But Democrats indicated the same reluctance that stalled attempts to extend the tax breaks during the legislative session that adjourned last week. Spokane Democratic Rep. Jeff Gombosky, chairman of the House tax committee, warned against paying for long-term tax breaks with one-time federal aid. Tax incentives are "going to compete with everything else in the budget," he added.
While rejecting proposals to increase taxes or expand state-run gambling, the Legislature did approve about $446 million in revenue increases and budget shifts this year.
The largest chunk of that was the suspension of voter-approved public-school spending. Lawmakers shifted $237 million in property taxes to the general fund, money that Initiative 728 had previously dedicated to class-size reduction.
Officials expect price increases at state-run liquor stores, and some store relocations, to bring in nearly $20 million. They are also counting on about $126 million from increased tax collection enforcement and changes to rules regarding unclaimed property.
Yesterday's lower tax collection forecast would cut the net revenue increase of such measures to about $289 million.
P-I reporter Angela Galloway can be reached at 360-943-3990 or angelagalloway@seattlepi.com
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