Staggering amounts of federal aid have been an unprecedented boon to the state’s coffers in the last two years. And this current fiscal year at least, the state’s economists say, Vermont can expect its revenues to continue climbing ever-upward.
But the economic momentum is expected to slow, and revenues should start falling back to earth the following year. Vermont’s general fund — the state’s largest pot of money — should have roughly $80 million less to spend for the fiscal year starting July 1, 2023, than it will have this year, economists predict.
“This is one of the best bad forecasts that we’ve ever presented,” Tom Kavet, the Legislature’s economist, told the Vermont Emergency Board on Thursday. The panel, composed of the governor and the four lawmakers who chair the Legislature’s budget and tax-writing committees, traditionally meets twice a year to adopt “consensus” revenue forecasts prepared by the state’s economists.
Revenue forecasts remain at historically high levels, according to Kavet. And the state is estimated to have roughly $150 million more this fiscal year — and $40 million more the following — than it was projecting six months ago, when state economists last compiled an economic outlook.
“Like almost all the economic statistics that we look at today, there's this confusing swirl of, ‘Things are great, things are terrible. Things are — what are they?’” he said.
The trillions dropped into the U.S. economy over the course of the pandemic — $10 billion of which flowed to Vermont — has landed the country in a “giant experiment” that is testing and confounding economic models, Kavet said.
Incomes across the board have soared in the pandemic-era economy. So, too, has inflation, as demand for goods and services has gone up. But while the Federal Reserve is expected to keep raising interest rates in an effort to get inflation under control, Kavet argued that intervention will do little to address the other factors causing inflation to climb — namely, the war in Ukraine and supply chain problems.
“To what extent is inflation going to cause people to really cut back? To what extent are higher interest rates really going to cause people to reduce demand? Because if it doesn't, then the rates are going to go higher and higher and higher until they do,” he said. “And that's where you get into more of a recession risk.”
This strange new world makes traditional economic markers hard to interpret. The U.S. Department of Commerce reported Thursday that gross domestic product has fallen for the second quarter in a row, fanning fears that a recession is just around the corner — if not already here.
But echoing many national economists, Jeff Carr, the economist for Gov. Phil Scott’s administration, and Kavet assured the panel that other telltale signs of a downturn for now just aren’t there. Unemployment rates across the U.S. remain extremely low, they noted — and especially so in Vermont.
Carr put it this way: “When was the last time that we were in recession and anybody who wanted a job could get a job?”
Still, he stressed that the general economic landscape remains deeply volatile and uncertain. “We're kind of hoping that the push and pull doesn't do something like this,” Carr said as he gestured a spiral with his fingers.
Rep. Mary Hooper, D-Montpelier, who chairs the House Committee on Appropriations, asked the economists if they had an inkling of the impact of the massive surprise climate, energy, and tax deal struck in the U.S. Senate on Wednesday.
“It’s too early to know,” Kavet responded.
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