March 2024 Forecast Five: Fiscal Madness
It’s time for another Forecast Five, where CFI gets down in the details so you don’t have to. Check out our top five takeaways from the Legislative Council’s presentation on the economic and fiscal outlook for Colorado.
1. TABOR Cap means the budget can’t keep up.
We can’t stay even budgeting to the Referendum C cap. The General Fund is projected to have $938 million available to spend relative to what was budgeted in FY2023-24 — but we can’t use it for anything new. When we account for caseload growth, inflation, and other budgetary pressures, we actually need an extra $1.2 billion to keep up with operational costs. In fact, we’ll need to find the $262 million difference somewhere. Legislators are proposing to lower our 15% reserve — our rainy day fund — to 13.3% to keep us even.
2. Higher cash funds and slower population growth means a tighter General Fund.
Back in December, the TABOR Cap was expected to grow 6.1%. Now the inflation and population growth rates are finalized, the TABOR cap will only grow 5.8%. This impacts how much revenue the state is allowed to keep and spend. A lower growth of the cap means $54 million fewer dollars the state has to spend relative to what we thought in December.
Severance tax, transportation fees, and other cash funds also impact how much revenue the state can use. When cash funds go up, it means higher TABOR rebates must be paid out of the General Fund. Transportation cash funds are up because new road usage fees fully came online this year and some other transportation fees, which were lowered in the past two years, are back to their full level. This combination means higher TABOR rebates, but fewer dollars to spend on roads and schools.
3. Inflation is easing while unemployment ticks up.
After the dip from the pandemic and a short, unsteady recovery, economic growth has returned to normal — and actually exceeded expectations. Consumer spending has picked back up after the come-down from the pandemic spike, and inflation is slowly, but surely, coming back down. After the labor market raged from mid-2021 onwards — Colorado added 18,600 jobs from June 2021 to January of this year — our employment gains are slowing, and our unemployment rate is ticking back up. Though we are still below the national average of 3.9%, we are anticipating a 3.7% rate over the course of 2024.
4. The economy avoided a blow-out loss.
As the Federal Reserve has pursued aggressive monetary policy — raising interest rates — to tamp down inflation, many feared it would trigger an economic slow down. But the GDP growth at the end of 2023 and 2024 was surprisingly strong. Growth of the economy is comparable to moderate economic expansion. Seems we’ve tamed inflation without a recession. Consumer spending is strong although there is some weakening in the retail and food service sectors, which could signal that consumer spending may be strained in the future. Another positive has been the real wage growth in the past several months. As inflation is dropping, nominal wages are outpacing price increases. This means real wage growth.
5. Housing is still the biggest foul on Colorado consumers.
Although inflation is slowing, some components are changing faster than others. At the height of the pandemic, soaring transportation costs made up the bulk of the state’s cost of living increases — but starting in 2022, and stubbornly sticking around until now, housing inflation has contributed the most to the headline inflation rate. Transportation, food, and beverage inflation have all come down significantly in the last two years, and housing inflation is persistent, floating between three and four percent for the past 24 months. With households spending a greater share of their budgets on housing, they are saving less. The national savings rate, currently sitting at 3.8%, is below the historic average of 5.7%.
