Michigan’s Anticipated $3.2B Budget Gap Down to About $900M

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The Big Questions Out of Monday’s Revenue Estimating Conference

Monday’s rare August Consensus Revenue Estimating Conference (CREC) in Lansing left Michigan facing a much smaller, yet significant budget gap than originally predicted in May.

The good news is that forecasts were revised reducing the anticipated budget gap from about $3.2 billion down to about $900 million.

The bad news, Michigan still faces a $900 million budget gap!

That’s just under $1 billion for a state that once again was hit harder by the recession than the rest of the country.

But why such a smaller budget gap than predicted back in May?

For one, tax payments typically due in April were pushed to July, accounting for $200 million in revenue not present in May. Other reasons were the better-than-expected recovery of automotive and manufacturing, the impact of the CARES Act funding, and Michigan’s consumer spending outpaced the rest of the nation and offset many of the sales tax losses in other areas.

The big lingering question, however, is just how bad will the financial pain get if an additional round of CARES Act stimulus funding doesn’t arrive?

Like in May, economists hypothesized with caution during Michigan’s second virtual CREC but here is their analysis, forecast, and other key takeaways from Monday’s presentation.

Event-Driven Downturns Are Different

Unlike the Great Recession, the current recession is being driven by an event – the COVID-19 pandemic. This means the underlying components of the economy weren’t necessarily weak, like in previous recessions. So in some ways, recovery is a waiting game once the event subsides … assuming the event (COVID-19) is contained or subsides.

Higher-Paying Jobs Bouncing Back Faster than Lower-Paying Jobs

U of M economists participating in the conference noted a two-track recovery. Slower recovering industries were predictably in hospitality, including restaurants and hotels, and services such as salons, which have many lower-wage workers averaging about $28,000 per year. Faster recovering industries where higher-paying averaging about $65,000. This is notable as a two-track recovery is likely only to exacerbate income and equity gaps that have been elevated during the COVID-19 and racial crises in the U.S.

Recession Gets Worse Without Next Round of Federal Stimulus

Economists’ predictions for modest economic recovery in the coming years rested on the assumption that a deal for a fifth stimulus package of at least $300 billion is reached, including income support of $350/week, another round of stimulus checks and funds for local and state governments. Failure to do so could drop the U.S. Gross Domestic Product an additional 1.4% while leading to a reduction in personal income of 2.5%.

 Unprecedented CARES Act Worked – For Now

Three CARES Act programs added nearly $43.3 billion to Michigan’s economy during the second quarter of 2020, which is about 8.5% of annual state personal income. That served as a major stabilizer of Michigan’s economy.

  • Paycheck Protection Program – Nearly $16 billion has been loaned to Michigan businesses allowing them to pay employees and stay solvent.
  • Economic Impact (stimulus) Payments – Provided $8.3 billion to Michigan residents.
  • Unemployment Insurance Compensation – $13.4 billion of a total of $19 billion was federally funded as benefits were expanded to many previously ineligible individuals.

 COVID-19 vs Federal Stimulus Is a Contest in Endurance

There’s no debating the federal stimulus helped many individuals and businesses weather the initial economic downturn and resulted in drastically lower than expected revenue losses. However, in May, many had expected COVID-19 to be less of a barrier than it remains in August.

So another big question remains, can the next round of CARES Act stimulus outlast the virus?

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