December 2023 Forecast Five: Coming Down to Earth
1. Slowing Inflation Points to Lowering Interest Rates in 2024
Tight monetary policy throughout 2023 (i.e. raising interest rates) had its intended effect of curtailing headline inflation. After an 8% inflation rate last year, we are looking at a 5.2% rate in 2023, then getting closer to what we’ve been used to at 3.5% the following year. Still, inflation in November in Colorado was higher than the rest of the U.S. Inflation was 4.5% in Colorado compared to 3.1% in the U.S. Higher housing and medical care costs in Colorado are driving that difference. With inflation abating, the forecast predicts that interest rates will be cut in 2024. Inflation is one of the reasons households are saving less. Household savings, which were bolstered during the pandemic (particularly among households that were able to keep working), have fallen below historic averages. Households are currently saving 3.8% of income compared to the historical average of 5.7%. This indicates that households may start to spend less, which could increase recession risk in the future.
2. Jobs Forecast Consistent with Long-Run Expansion
Colorado’s unemployment rate of 3.3% is below the national rate of 3.7%, but it has ticked up from 2.9% back in July. The economic slowdown has impacted employment in some sectors more than others — while job gains were made in government, leisure and hospitality, and education and health services, the trade, transportation and utilities, construction, and financial activity sectors all saw overall job losses. Colorado’s economy is expected to grow 2.5% in 2023 thanks largely to a big third quarter. Despite an uptick in unemployment, there’s signs that real wages are growing.
3. General Fund Outlook for Next Year’s Budget: Not Quite Staying Even
There’s expected to be $1.15 billion more revenue to spend in next year’s budget (FY2024/25) compared to this year’s budget — but once you account for things like caseload growth and inflation, that all essentially disappears. In fact, if you assume the governor’s recommendations for next year’s budget, we will be $84 million short of the 15% statutory general fund reserve requirement. This means there isn’t any new money for new public investments — we just maintain.
4. TABOR Rebates Still on Horizon but Smaller than Last Two Years
Don’t get used to $3 billion plus TABOR surpluses. Each tax filer will get $800 back from the state when they file their income taxes for tax year 2023 (they aren’t mailing checks like last August). The past two years with over $3 billion in TABOR rebates had a lot to do with historic corporate income tax collections, which are expected to come back down to earth. After a 50.9% increase in 2022 following big increases in 2021, the forecast expects a 16.5% decline in corporate income taxes this year. Declining corporate income taxes collections means less revenue above the Ref. C cap, which means less revenue in TABOR rebates
5. Schools: Enrollment Declines, Uncertainty about Local Share, Zero BS Factor?
The special session added uncertainty to this year’s school finance projections. Policies set during the session will impact property taxes, so the extent to which local property taxes will fund schools isn’t 100% clear yet. But, rising property tax collections have boosted the odds of finally zeroing out the annual shortfall in school funding known as the budget stabilization factor — though the balance in the State Education Fund will decline over the next several years to achieve that goal. Student enrollment continues to decline as a result of lower birth rates. The biggest decline in students occurred in the Denver area while areas of the state with relatively cheaper housing costs, like Colorado Springs, have seen growth in students.
