This is going to be very interesting

With the revenue forecast yesterday, the game has changed even more than expected. This will be an interesting study in special interest politics to see which group protects itself the most from the shrinking budget.

You see, Oregon's government doesn't know how to shrink. Over the last 25 or so years, despite all the times we read about the budget "crisis," the problem was always that the money didn't grow fast enough to cover the planned growth of the budget.

But the current situation is quite different. They have to make actual cuts - not slow the growth, but actually cut. And it has to start right away.

Here are some numbers. At the end of the 2007 legislative session, the forecast was that the 2007-09 budget general fund resources would be $14.1 billion. The budgets were based on that amount, even though a lot of legislators warned that the economy was headed toward recession and therefore it was likely that actual revenues wouldn't be that high.

Senator Larry George was chief among those warning that the budget adopted in 2007 was going to create a crisis when revenues fell short. He's looking pretty prophetic now, as the estimate for the current biennium which (ends in June) has dropped from $14.1 billion to $13.1 billion.

Which means, in order to balance the current biennium's budget, they have to somehow find a billion dollars in cuts from the current spending trajectory, and do it in the last four months of the biennium.

(I'm getting these numbers from page 101 of the actual economic forecast report released yesterday. They are a bit different than what I remember the general fund forecast numbers that were bandied about at the time, but the point remains the same.)

Cutting a billion out of the last 1/6th of the biennium is not going to be pretty. It would be one thing if they had to spread the billion out over the full two years. But look at it this way: Of the 14 billion they planned to spend, the state would spend about $2.3 billion in the last four months. So they have to figure out how to cut that by a billion - by almost half.

There are reserves they can tap into, but it is still a big problem.

And then there's the problem of the NEXT biennium. When the government plans its budgets, it takes the current budget and "rolls it up," - it assumes this baseline, adds inflation and other factors for things such as increased caseloads for social programs, population increases, etc, and that's what it assumes it needs for the next biennium.

Rolling up a baseline budget of $14.1 resulted in a "current service level" budget for 2009-11 if about $16 billion. That is what the government says it needs to keep things the same. But the forecast says now that 2009-11 revenues are going to actually drop a bit from the new revised 2007-09 level of $13.1 billion. So instead of the $16 billion they say they need, they anticipate having $13.05 in 2009-11.

Yeah, that is a problem. They don't know how to cut. The whole system is built on an assumption of increased budgets. The cost structure of government locks in a need for more money every biennium.

So what happens when the money isn't there? Well, we will see. But you can sure make a few predictions:

1) Screams for tax hikes. Democrats ALWAYS want tax increases. It actually doesn't matter whether baseline revenues are growing or not, one thing has remained the same. Every single biennium since I have paid attention, the Democrat party has wanted some kind of tax hike. Even in the fat times of the 1990's, when biennial budgets grew at a 20% pace, there wasn't enough to go around and they looked for ways to squeeze more out of the economy. So they will surely do it again this time around, and they have the supermajorities to make it happen.

2) Different government constituent groups will turn on each other. Teachers unions, environmental groups, social service advocates, health care advocates - they will get increasingly shrill as they all vie for a bigger share of a shrinking pie, in order to keep their constituents relatively whole. This is the part that will be somewhat fun to watch, in a macabre sort of way.

None of this is good for Oregon. I have read several times recently criticism of conservative opposition to tax hikes. It goes something like this: "Conservatives say that a recession is a bad time to increase taxes. But they also say we don't need a tax increase when times are good. So just WHEN do they think it IS a good time to increase taxes???"

Well, to put it in a word: Almost NEVER!

Why should the government EVER get a larger share of the economy? When the economy is growing, the government revenues will automatically grow along with it (although never as much as the liberals spending wishes.) When the economy is shrinking, the one thing you can do to make sure it shrinks faster is to raise taxes.

The upshot is we really should almost never raise taxes. It is short sighted and self defeating. This is the path Oregon has gone down for two decades, and look at our economy. It is in a shambles. And it is not going to get better.

To some extent the Obama spending bill will alleviate some of the problem for the current crisis. But that only delays the day of reckoning. It just artificially props up government spending in one cycle through a windfall of outside dollars, making the problem worse next time.

And the liberals always accuse business of planning short term!

I don't have any "solution" to Oregon's budget woes. Nobody does, in reality. But I think it behooves everyone to have a grasp of the underlying numbers, which is why I wrote all this down.