Traverse City Record-Eagle

Michigan

January 12, 2013

Michigan outlook is stable, risks remain

BY THE ASSOCIATED PRESS ----

LANSING — Officials agreed Friday to state budget figures for Michigan that could mean no major cuts next fiscal year but no return to past spending levels, either, as the state enters its fourth year of modest economic growth after a decade-long recession.

Though revenue is expected to be lower this fiscal year than previous projections, that is mostly because of a business tax cut approved in 2011 by Republican lawmakers and Gov. Rick Snyder. Budget director John Nixon said 2012 changes such as the decision to speed up a reduction in the state income tax also were accounted for in the current spending plan.

He said the overall budget outlook is stable, marking a change from past structural billion-dollar deficits made worse by the recession.

"We don't anticipate needing to make any (spending) reductions, and the good news is the economy is giving us some more money to make strategic investments," he told reporters after meeting at the Capitol with the directors of the House and Senate fiscal agencies about next year's budget.

But he cautioned that because Michigan is slowly recovering, Snyder may not be able to "make huge steps" on items such as education funding — which was slashed two years ago and saw a slight increase in 2012-13.

The Snyder administration and legislative analysts estimated that the state's two main accounts will take in $20.7 billion in the fiscal year starting in October, up nearly $800 million, or 3.9 percent from this year. The $19.9 billion expected for this fiscal year is down about 1 percent from the budget that ended in September.

The Republican governor will use the figures in preparing a spending plan to be proposed in February. Another revenue conference will take place in May, so legislators have a clearer picture before finalizing the next budget.

"We're not in a crisis-management situation that we've been in in many years past," Nixon said.

The upcoming battle over federal borrowing and spending cuts could affect Michigan's economic outlook.

If Congress fails to increase the debt ceiling, state governments could be in trouble, said Nigel Gault, chief U.S. economist with IHS Global Insight. A large chunk of the $48 billion budget is funded with federal dollars, and the U.S. could be forced to cut 25 percent of spending "overnight," he said.

The federal government likely would prioritize making interest payments and writing Social Security checks, he said.

"Certain payments to states or contractors would be low down on the list of priorities." Some legislators, including House Appropriations Chairman Joe Haveman, expressed worry about the potential harm that a debt ceiling standoff could have on the markets and the country's economic recovery.

"We've righted the ship and we're very frustrated as to where we're seeing the federal government going," said Haveman, a Holland Republican.

University of Michigan economist George Fulton told officials that the state's unemployment rate should continue to drop, from 8.9 percent in December to 8.3 a year from now and below 7 percent by late 2015. He expects Detroit's three automakers — drivers of Michigan's economy — to sell 300,000 more vehicles in the U.S in each of the next three years. Another bright spot is the housing sector.

Job growth was sluggish in 2012, though, and has not been as robust as it was after past recessions.

Just four in 10 of the 859,000 jobs Michigan lost from 2000 to 2009 will have been replaced three years from now, Fulton said.

"We have a ways to go, but we're seeing forward progress nonetheless," he said.

Democrats at the meeting questioned whether the GOP tax changes that shifted the burden from businesses to individuals have hurt consumer spending. They also asked why there was not more job growth, since Republicans had said the elimination of the Michigan Business Tax would improve the business climate.

"My suspicion is tax cuts went into their pockets and not toward jobs," said Sen. Glenn Anderson, a Westland Democrat.

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