Possible recession could have a big impact on future AZ budgets

Caitlin Sievers

(Arizona Mirror) With a possible recession on the horizon and amid great economic uncertainty, the state of Arizona will have quite a bit of extra cash in its general fund this year — but that excess will quickly dwindle in the next few years with current spending, budget analysts said Thursday.

The state’s general fund is set to have a $1.8 billion surplus when the current fiscal ends in June, but that excess cash is expected to decline to only $1 million in 2025.

That means any new ongoing spending adopted in this year’s budget will lead to a deficit in two years, Joint Legislative Budget Committee analysts said.

That’s a more conservative estimate than Democratic Gov. Katie Hobbs had in her executive budget proposal, which recognized that the predicted surplus would largely be one-time money. Hobbs proposed about $2.5 billion in new spending, of which $2.1 billion was slated for one-time expenses.

Hobbs’ office  did not respond to questions about the one-time spending in her budget by the deadline for this story.

There’s no guarantee that a budget even remotely close to what Hobbs proposed will be passed, with Republicans in control of both legislative chambers. Republicans balked at Hobbs’ proposal, especially her plan to get rid of the universal expansion of school vouchers.

Republicans announced their own budget plans, saying they refuse to negotiate on any new spending until a so-called continuation budget is in place to maintain current spending levels. They are expected to consider that budget plan as soon as next week.

Lawmakers and state officials will have to somehow bridge the gap between the priorities of the two parties and pass a budget by June 30 to avoid a government shutdown. But they have more than ideological differences to contend with in the next couple of years, with economists unsure if the country and the state are headed for a full-fledged recession, which could significantly impact state revenue.

Following a 17% increase in revenue for the state general fund in 2022, and an expected 7.5% increase this year, the increase in the upcoming fiscal year is only expected to be around 2%, according to the JLBC.

This is due to multiple factors, including the implementation of the state’s new flat income tax, a newly proposed $100 per child tax credit and proposed tax exemptions for feminine hygiene products and children’s diapers, in addition to possible decreases in income and other tax revenue, if predictions that a recession is coming prove accurate.

While various national groups representing professional economists predict between a 50% and 80% chance of a recession in the 2023 calendar year, JLBC acknowledged that it’s difficult to figure out exactly how that might impact Arizona’s future budgets.

“Given the economic uncertainty, our revenue estimates will likely change considerably as we go through the FY 24 budget process,” JLBC said in its presentation.

Elliott Pollack, a veteran Valley economist, expects a coming collapse of the housing market — but much less severe than the 2008 crash that led to the Great Recession.

“It’s a completely different ballgame,” Pollack said of the current housing market in comparison to before the 2008 crash. “I’m not nearly as concerned about the housing market as some people are.”

Pollack said he expects the next year will bring a slowdown in retail sales, continued inflation higher in Arizona than that in the rest of the country and continued issues with housing affordability and homelessness.

“This is the lowest level of housing affordability we’ve ever had in Phoenix,” he said.

In the long term, Pollack predicted the housing market would rebound, economic development will continue to be strong and Arizona will keep creating more jobs than most of the rest of the country.