Prosperity Watch Issue 46, No. 4: A new (old) direction in state budgeting needed

State policymakers will set forward their budget proposals for the next two years in the coming weeks.  North Carolina’s ability to stage a real comeback will depend on the decisions they make. Unfortunately, North Carolina continues to invest far below historic averages making it more difficult for our schools, health care, courts and environmental protections to line up with a modern economy. 

In order to properly evaluate how state spending has changed over the years, one has to control for the size of the economy.  The value of the dollar not only erodes over time so that a set amount in 1964 would only be able to purchase a fraction of the goods and services in 2014.  It can also fail to reflect the capacity of state services to support a larger economy with more students to educate, workers to train, businesses to support, and infrastructure to maintain. 

Measuring state appropriations as a share of total state personal income, a proxy for the economy's size, offers one way to assess how adequate state investments have been over the years. By taking the average level of spending as a share of the economy over time, it is possible to determine whether spending decisions are in line with historic trends and how they diverge. 

In North Carolina, a look back at this measure shows that current spending decisions are at historic lows as a part of the economy.  Today, North Carolina spends about 5.2 percent as a share of state personal income.  This is well below the historic average of 6 percent and the same level that the state was investing at in 1973.  It's also important to note that state spending over time remains relatively consistent as a share of the economy. 

Click the image below to enlarge

If North Carolina policymakers were spending as a share of state personal income at pre-recession levels, there would be an additional $3.2 billion available to invest in education, health care and public safety, among other services. In fact, as detailed in the figure above, with these additional dollars North Carolina could ensure that:

  • all children have access to pre-K programs;
  • all seniors who need it can get meal services in their home;
  • all graduating seniors can continue their post-secondary education at no cost;
  • all 60 counties with low employment levels could implement a wage subsidy program to spur private sector hiring;
  • and courts could ensure the representation of indigent clients and the efficiency of the justice system.

The reason that these dollars aren’t available and that waiting lists and the quality of our services is eroding in these areas is that policymakers have chosen to hold down spending by cutting taxes. 

In order to build that strong foundation for a growing economy, North Carolina’s state budget must at least match the needs of our economy and should aim to keep up with the changing and growing needs of our families and communities. This will only be possible if policymakers address the growing cost of the tax plan and ensure that North Carolina makes investments adequate to support the economy.

 

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