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Louisiana's fiscal crisis decades in the making

Pelican Institute for Public Policy
Wednesday, August 25, 2010 - 1:52pm

Although the economic recession has contributed to Louisiana’s ominous deficit, a new report from the Mercatus Center at George Mason University stresses that state spending trends meant the problem was building for decades.

Between 1987 and 2007, Louisiana’s government spending grew at almost three times the rate of private sector spending. On a per capita basis, adjusted for inflation, government spending increased by 150 percent, and according to Matthew Mitchell, author of the study, that trend was “simply unsustainable.”

“There would eventually come a point where the entire Louisiana economy is government. So clearly it can’t go on forever. Spending cannot constantly outpace the growth of the economy as a whole.”

According to data compiled by Mitchell and released on August 23rd, had Louisiana held spending per capita constant from 2008, there would have been no shortfall in the past year. In fact, when he accounted for all 50 states, going back to 1987 (when complete data became available) he found “the change in spending rather than the level of spending” to be the leading cause of recent budget deficits.

In other words, states with relatively constant spending, be it high or low per capita, were better off when the recession came than states that had expanded spending.

As one can see from the figure below, in the last five years Louisiana fits into the latter category. Per capita spending, adjusted for inflation, increased at an annual rate of more than 20 percent.

Louisiana may face a shortfall of more than $3 billion next year, according to State Treasurer John Kennedy, and Mitchell's analysis does not bode well for an easy turn around.

“Louisiana, in particular, given that it had rapid increases in per capita spending [and] it has relatively low levels of economic freedom, I would predict that they are likely to experience budget difficulties for a number of years.”

In an earlier report, released one week prior, Mitchell considered a range of other factors, in addition to spending trends, that impact fiscal deficits. Among his findings were that states with “strict balanced budget requirements” faced substantially smaller budget gaps, to the tune 35 to 45 percent.

“Budget gaps are the degree to which spending outstripped expenditures... [If] we have a balanced budget requirement we have to figure out a way to deal with [the disparity]… In the long run, it’s kind of ironic, but states that have strict balanced budget requirements end up facing smaller budget gaps in the first place. It’s kind of as if they know they have to balance their books. They end up encountering budgeting pressure over the short run, in anticipation of that.”

Mitchell also believes that because all states, except Vermont, have some form of balanced budget requirement, they “have been much more responsive than the federal government in dealing with budget gaps.”

“But, these balanced budget requirements vary a lot from state to state. And some of these requirements are relatively weak... Louisiana is sort of middle of the road in terms of their balanced budgets requirements… They do allow the state legislature to use long-term funds in order cover short term expenses – and this is relatively rare. Most states don’t allow things like that.”

In his interview, Mitchell wanted to make clear that his findings highlight the importance of fiscal stability. “The process of closing these budget gaps has been very painful, even for those who are in favor of a relatively active state government. It’s been painful for them because [it has] involved budget cuts and furloughs."

“In my mind a much more reasonable path is to just restrain spending growth over the long run, rather than a boom and bust budget cycle, where you grow too big, hire too many people, and then have to fire them.”

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