Forecast Five: September 2021
By Chris Stiffler
#1 – The economy is rebounding, and state revenue is soaring
78 percent of the jobs Colorado lost since Spring 2020 are back, which is slightly above the rest of the 76 percent mark for the country as a whole. Overall wages are growing faster than before the pandemic and the pockets of places where wage growth had been lagging are now shrinking. This job and wage growth, accompanied by government payments, is driving growth in state revenue collections. Individual income tax withholdings and sales tax collections, the two biggest components of General Fund revenue, are exceeding pre-pandemic trend growth. Additionally, retail sales in the hard-hit industries like hotels and restaurants are now back above pre-pandemic levels.
#2 – The budget outlook is looking good
To give a feel for how much money legislators must invest in services in next year’s budget, Legislative Council compares their three-year revenue projections to what is being spent in the current year’s budget. They are estimating that the General Assembly will have $3.3 billion more to budget for when they write the FY2022-23 budget then what was spent in this current budget. While that amount does not consider increasing numbers of students in K-12 schools, the number of patients using Medicaid for health care, or inflationary pressure, $3.3 billion to spend above this year’s appropriation shows solid economic growth.
That growth has now exceeded inflation by such an amount that it resulted in $453 million in rebates (mandated under TABOR) for the budget yeat that ended on June 30 of this year and will show up in refunds when taxpayers they file their 2021 taxes next year. Among the mechanisms used to refund that money is a temporary reduction in the income tax rate to 4.5 percent. Refunds are projected to exceed $1 billion annually for the next three years.
The state’s reserve is also healthy. The current budget has a projected reserve of 28.6 percent, which is $1.9 billion above the current 13.4 percent reserve requirement. This level of revenue makes budgeting less risky since legislators can predict that any forecast change will be absorbed by these reserves and unspent dollars.
#3 – The Pandemic has exacerbated wage and wealth inequality
Not all the news is good, however, particularly when it comes to equity. High-wage jobs have more than rebounded while low-wage job recovery hasn’t kept pace. Colorado’s unemployment rate dropped below 6 percent for the first time since the pandemic began, hitting 5.9 percent in August. Though this is still lower than the national unemployment rate of 5.2 percent, that number in isolation can be misleading. In fact, the data shows more Coloradans are actively looking for work than nationwide, which leads to more people being counted as unemployed.
Unemployment rates vary across demographics. 5.8 percent of Colorado women are unemployed, while the rate for men is slightly higher at 6.1 percent. Unemployment remains high for Black workers at 14.5 percent. It also varies by age, with younger workers 20-24 years old and workers 55 and older employment continuing to lag pre-pandemic levels. For workers between 35-44, employment has almost fully recovered.
Education is also playing a role, with 8.9 percent of Colorado workers without a high school degree currently unemployed.
The recovery has also been unequal across economic groups. The net economic value held by people who earn the lowest 20 percent of incomes increased by only 2.5 percent (pre pandemic growth levels were close to 15 percent). Meanwhile, the net worth of the middle and high end of the distribution grew by 13.1 and 13.9 percent (nearly twice as high as pre-pandemic levels). This is largely due substantial growth in the price of real estate and the value of stocks.
#4 – The uncertainty of inflation has many interconnected budget impacts, but it may be temporary
Inflation doesn’t just affect the ability of consumers to afford goods and services. Many of Colorado’s complicated and unique fiscal policy constraints are affected by inflation. For instance, the revenue cap mandated by TABOR factors in inflation and the school finance formula is based on per-pupil growth and inflation.
While the headline inflation rate currently sits at 5.2 percent—well above the standard 2 percent it has been for the past decade—it hasn’t been growing across the board. Energy and transportation are the biggest components driving higher headline inflation rates, both of which saw dramatic effects from pandemic public health measures. As we see more data come in, the expectation data suggests the spike in inflation is temporary or transitory. For example, OSPB’s economic forecast shows that long-run inflationary measures (5-10 years out) taken at the University of Michigan rose only slightly to 3 percent from 2.8 percent. This leads state economists to believe that price spikes consumers are feeling now will head back to normal in a year or so.
#5 – The Child Tax Credit expansion has given a big boost to household budgets
Total personal income is growing, and that growth partially reflects implementation of the expanded federal Child Tax Credit’s (CTC). The program provides monthly payments of up to $300 a month per child, and with 600,000 Colorado parents eligible to receive this benefit, it’s resulting in a monthly injection of $255 million into the state’s economy. Early evidence suggests this is having a real impact on the number of families living in poverty. For example, the number of families with kids earning less than $35,000 who reported not having enough to eat dropped by 8 percent this year.
