The practice of ignoring the inevitable effects of inflation understates the size of projected state deficits.
In 2002, the Legislature and then-Gov. Jesse Ventura were painfully aware of a looming state budget deficit and did not want to take the politically unpopular move of increasing taxes or cutting spending to bring the budget into balance.
The solution was simple and politically shrewd, but fiscally and intellectually bankrupt. They decided, on a bipartisan basis, to ignore the impact of inflation on state expenditures but to continue to include it on state revenue.
For example, the growth of state sales tax revenue due to the effects of inflation was incorporated in the state forecast. However, the role of inflation in driving up the cost of the goods and services that the state purchases was ignored.
In this way, the state budget was technically balanced, but not through a combination of honest tax increases and spending reductions. Rather, it was done by ignoring the effects of inflation on expenditures, thereby artificially lowering costs.
Minnesota is still suffering as a result of this political bargain. The practice of ignoring the inevitable effects of inflation understates the size of projected state deficits and leads policymakers and the public to conclude that the state's budget problems are less than reality.
For example, the official state budget deficit projected for the 2014-15 biennium is $1.1 billion. However, the state's true fiscal condition is actually worse than this number indicates. By ignoring the effects of inflation, the projected level of 2014-15 state spending is understated by $900 million, and the size of the budget deficit realistically measured is actually $2 billion and not $1.1 billion. Now, these numbers could change with the next forecast, but the construct remains the same.
Responsible finance experts have long recognized the need to honestly measure the effects of inflation on both the revenue and expenditure side of the state ledger. For example, the Minnesota Council of Economic Advisors and the 2010 nonpartisan Budget Trends Study Commission both have recommended a return to the pre-2002 practice of taking into account the impact of inflation.
Opponents contend that this would place the state budget on "autopilot." What nonsense! Simply acknowledging the reality of inflation does not mean that state government must provide inflationary increases in state spending. The Legislature and governor will still be able to reduce spending or increase taxes in order to ensure that the budget is balanced. What they would not be able to do is shirk their obligation to responsibly balance the long-term budget by hiding behind the myth that inflation will have no impact on the cost of the services and infrastructure that the state provides.
This attempt to mask the truth has led to 10 years of rolling budget deficits, a lowering of our credit rating, and an increase in the public's skepticism toward government.
We can no longer afford anything less than total honesty and transparency to govern the management of our money.
Arne H. Carlson was governor of Minnesota from 1991 to 1999.
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