Wednesday, February 2, 2011

Cautious Optimism

            Politically, I find the national and state debates on deficits somewhat encouraging in that we seem to be finally facing up to the grim realities of financial discipline.  Now that Republicans are players both in Congress and the Minnesota State Legislature, they will be compelled to go beyond the slogans and deal with the painful realities of making hard choices.

            Nationally, the debate is all over the place without much focus and even less courage.  How interesting that virtually everyone is sidestepping the report from the National Commission on Fiscal Responsibility and Reform headed by Erskine Bowles and Alan Simpson.  Hopefully, after the political dancing subsides, both parties will realize that the public is light years ahead of its leaders and this may cause some forward motion.  Otherwise, an overseas economic event will instantly sober us up.  A $1.5 trillion deficit cannot be ignored.   The more serious Congress gets now, the less painful the decisions will be tomorrow.  The Bowles-Simpson report is where it’s at.

            On the Minnesota level, the state is confronted with a huge $6.2 billion deficit.  However there will likely be good news in the February forecast as we seem to be making more steady progress toward recovery.   Nevertheless, high unemployment is likely to persist and this will put pressure on social service expenditures.

            Assuming improved quality growth and the continuation of the $1.7 billion school shift, it is possible that the deficit could approach $3.5 billion.  But, that is just a guess.

            Relative to final settlement, both parties will have to make significant compromises.  It will not be enough for the Republican legislature to simply cut without proper attention to reform and dealing with the impact.  During the past eight years, property taxes escalated some 75 percent and fees skyrocketed as the state simply cut and transferred without understanding the ripple effects.  Democrats have a similar problem except on the revenue side. This legislature is going to have to be long on thoughtfulness and thoroughness if it is to succeed.

            Toward that end, the Dayton Administration has a tremendous opportunity to take the lead on bi-partisan reform and restructuring which could ultimately lead toward budget resolution.  I remain optimistic.

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