COMPTROLLER LEMBO PROJECTS
$70.9-MILLION DEFICIT FOR FISCAL YEAR 2015
A final deficit for FY 2015 will be determined later this year after the state's financial books are audited and closed. Any remaining General Fund deficit for FY 15 will be eliminated through a transfer from the Budget Reserve Fund at the end of this calendar year.
In a letter to Gov. Dannel P. Malloy, Lembo said he is in general agreement with the Office of Policy and Management's (OPM) latest deficit estimate, which decreased by $44.8 million from last month's projection.
"The slow growth in General Fund revenue during the 2015 fiscal year produced significant budget challenges in order to mitigate a sizeable deficit," Lembo said. "Active budget management held spending growth to under 3 percent in Fiscal-Year 2015 compared to last fiscal year.
"While the administration's efforts to manage spending helped significantly to reduce the deficit, there is a great need to evaluate and address persistently slow wage growth. Despite significant job growth during FY 2015, the payroll-driven withholding portion of the income tax has failed to generate the anticipated gains."
Lembo pointed to a recent study by the Federal Reserve Bank of Cleveland that found a significant correlation between wage growth and two economic variables: productivity increases and labor's share of income.
"The study is saying that a declining trend in the hourly output of workers, along with businesses opting to invest more heavily in capital equipment and other non-payroll spending has depressed wage growth," Lembo said. "If businesses can effectively substitute equipment, technology or outsourcing for local workers, then there is no need to increase wages to attract or retain skilled labor.
"There are many theories about the decline in worker productivity - including receding business investment in education or training for workers, and less investment in technologies used by workers to be productive. This is consistent with a business model that has shifted to investing in non-payroll alternatives to production such as increased use of advanced machinery and other technologies, and utilizing lower-cost global outsourcing.
"The state must seriously consider and explore the many possible policy remedies - because, while jobs continue to grow, so must wages."
General Fund revenue for FY 15 is expected to fall $144.5 million below initial budget expectations. The largest single downward revision is in the income tax, which is projected to close the fiscal year $110.5 million short of budget expectations, Lembo said.
The most significant revenue increase is in the corporation tax, which is expected to exceed the initial budget amount by $107.7 million. Expanded tax credits were projected to reduce corporate payments during the fiscal year; however, the corporation tax is now estimated to grown 3.8 percent over last fiscal year. Lembo said the growth is, in part, attributable to the Department of Revenue Services' initiative to settle outstanding corporation tax issues, which resulted in a gain of $31.6 million in this area.
Total General Fund revenue growth for FY 15 is expected to be approximately 1.8 percent above last fiscal year.
General Fund spending for FY 15 is projected to fall more than $70 million below the initial budget plan.
"As I have been reporting, the state's overall economic climate has been gradually improving," Lembo said. He pointed to the latest economic indicators from federal and state Departments of Labor and other sources that show:
• Through June of Fiscal Year 2015, the year-to-date withholding portion of
the income tax was running 2.5 percent above the same period last year. This
analysis does not include comparative tax accrual data between fiscal years
because accrual activity is posted through the first week of August. For most of
Fiscal Year 2015, withholding receipts have been running slightly below the
levels experienced in the prior fiscal year.
• According to the Department of Labor, preliminary figures show that Connecticut gained 600 payroll positions in June. This follows the addition of 5,900 jobs in May (revised down from a preliminary figure of 6,400 jobs). Connecticut has gained 27,000 jobs over the past 12-month period, which brings total payroll employment in the state to 1,691,900. Over the entire 2014 calendar year, the state added 25,100 payroll positions.
• Connecticut has now recovered 97,900 positions, or 82.3 percent of the 119,000
seasonally adjusted total nonfarm jobs that were lost in the state during the
March 2008 - February 2010 employment recession. The state's jobs recovery is
now more than five years old and is averaging about 1,530 jobs per month since
• U.S. employment has been advancing at a rate of 2.1 percent over the
12-month period ending in June; Connecticut's employment growth was 1.6 percent
for the same period.
• The Department of Labor reports that average hourly earnings at $28.64, not
seasonally adjusted, were up 51 cents, or 1.8 percent, from the June 2014
average. The resultant average private-sector weekly pay was calculated at
$953.71, up just $2.92, or 0.3 percent higher than a year ago.
• The abnormally slow rate of growth in wages has also been experienced at
the national level and has been at the center of national and state debates on
appropriate wage rates.
• Between 1980 and 2014 labor income as a share of GDP has declined from 58.4 percent to 52.2 percent. This decline has also ocurred in labor's share of corporate income.
• The Federal Reserve Report found no economic forces that were positioned to
reverse the slow wage growth in the short term.
• Sales tax receipts through June of Fiscal Year 2015 were up 3.5 percent
over last year. The sales tax is on track to complete the year at least $43.8
million above the original budget estimate. Tax accruals in this category are
still being processed. Sales tax growth is at a relatively normal post-recession
Business and Economic Growth
• On July 30, the Bureau of Economic Analysis reported that advance estimates
showed second-quarter real GDP growth of 2.3 percent. Growth in the first
quarter of 2015 was revised to growth of 0.6 percent.
• Estimated income tax payments, which are influenced by capital gains
receipts, were trending 5.3 percent higher on a year-to-date basis thru June.
• Over the past 12 months, the Dow has posted a gain of 4.8-percent with significant monthly swings.
• As a result of the monthly volatility, the Dow has shown little movement on
a year-to-date basis.
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