Budget leaders forecast more pain

Economy growing, but not enough to cover $2b gap

By Michael Levenson
Globe Staff / December 14, 2010

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For months, Governor Deval Patrick has repeatedly sidestepped questions about how he intends to close a massive budget hole next year, saying that rising tax collections suggest that the gap is shrinking.

But his generalities and wait-and-see approach will give way to stark assessments today when administration officials, economists, and state lawmakers gather at the State House to begin confronting the budget for the fiscal year that begins in July.

Those specialists and lawmakers say that, despite some signs of life in the economy, the state continues to face an estimated $2 billion shortfall for the upcoming year, a chasm that will necessitate yet another round of painful cuts in services.

They say that even though the state has collected about $500 million more in taxes than was expected so far this year, that gain is being completely absorbed by increasing demand for health insurance for the poor, homeless shelters, and public defenders. In addition, about $1.5 billion in federal stimulus money that the state used to avert deeper cuts this year is gone, leaving the state with few options to paper over its problems.

“It’s a $2 billion gap, and the difference between that and the past is, that’s a real gap,’’ said Steven C. Panagiotakos, the Senate’s outgoing budget chief. “So that $2 billion is going to really mean huge cuts in services and in employees. Let’s face it: It’s government services across the board.’’

Michael J. Widmer, president of the Massachusetts Taxpayers Foundation, said the state is headed in the right direction for the first time in about two or three years, but is not growing fast enough to dig itself out of its budget problems next year.

Widmer said that he is predicting that the state will collect about $1 billion more in revenues next year than it did this year, but will still be short $2 billion, because the federal funds have dried up, demand for services continues to rise, and those services are increasingly expensive to provide.

“There’s no way the economy can grow enough to cover that hole,’’ Widmer said, adding that it will “require another round of significant budget cuts.’’

Alan Clayton-Matthews, an economist at Northeastern University said he and a colleague at Harvard, James H. Stock, have forecasted that revenues will grow by 3.9 percent next year, compared with about 4 percent this year.

“We’re getting back to almost normal revenue growth, but we’re in a huge fiscal hole and revenues aren’t growing fast enough’’ to eliminate next year’s shortfall, he said.

Christian E. Weller, an economist at the University of Massachusetts Boston, predicts that the state’s 8.1 percent unemployment rate will hold steady or dip slightly next year, but will still be high.

That sluggishness in employment suggests continuing problems for state finances, which need strong job growth and greater consumer spending to recover fully from the recession.

“My overarching point is that the economy is stuck in a slow-growth pattern,’’ said Weller, who is also a senior fellow at the left-leaning Center for American Progress. “There is some pain ahead.’’

Patrick, pressed by his rivals in the heat of his reelection campaign and in recent weeks, has declined to offer his own estimate of the gap, saying he needed to wait until today’s economic hearing to offer his own view.

He and state lawmakers have offered no details of how they intend to close next year’s gap, although they have said they have no plans to raise taxes.

“The good news is that state tax revenues are outperforming estimates, the economy continues to create jobs, and we are recovering faster and stronger than the nation as a whole,’’ Patrick’s budget chief, Jay Gonzalez, said in a statement yesterday.

“It will take time, however, to build our way back to where we were before the recession, and we will be losing $1.5 billion in federal stimulus funds next fiscal year,’’ Gonzalez said.

Advocates for the poor and disabled are deeply worried about the looming cuts. Yesterday, they pleaded with state human services officials to spare programs for the deaf, blind, and physically impaired.

“I’m frightened; I’m honestly frightened,’’ Diane Squires, who is deaf and advocates for the hearing-impaired, said at a State House forum, according to State House News Service. “I’m one of those people that will be affected.’’

The state expects to have about $550 million in reserves, but lawmakers and budget watchdogs have warned against spending that money to help balance next year’s budget. They say it should be saved for unforeseen, emergency expenses.

House Speaker Robert A. DeLeo, who estimates next year’s gap is about $1.5 billion, said yesterday that he sees no easy fixes. ‘Primarily,’’ he said, “I would see further cuts to the budget.’’

Michael Levenson can be reached at