By Mike Klein
Georgia’s ability to continue slow but steady economic growth might depend on factors beyond its control, including a “heroic assumption” that the federal government will somehow get its fiscal house in order. “If we can just solve things in Washington I think we will be ready to go,” state fiscal economist Kenneth Heaghney said Tuesday morning at the State Capitol.
Heaghney was largely upbeat and cautiously optimistic when he addressed House and Senate joint appropriations committee legislators. Slow growth is possible through 2017. Year-to-date year total tax revenue for six months ending in December was 4.9 percent, less than forecast. “Our revenue stream tends to be very volatile,” Heaghney said.
“Individual income tax is trending in the right way (year-to-date, up 5.4 percent) and underlying detail suggests an economy that is slowly improving,” Heaghney said. “Housing appears to have turned the corner both nationally and in Georgia. That takes away the severe negative that we saw in the early part of the recession and even in 2010.”
Evidence Georgia is rebounding includes: Individual and corporate income tax receipts continue to improve; existing home sales are trending up; several sectors report hiring growth, including manufacturing and trade; initial unemployment claims are down; and, the state’s 1.8 percent annual gross domestic product growth is better than the 1.4 percent national growth.
Heaghney predicted the Georgia private sector will create about 20,000 new jobs over the next six months and about 63,000 for the fiscal year that ends in June. With an eye on the “heroic assumption” that Washington can fix its fiscal house, Heaghney predicted job growth could pick up later this year, and, “In 2014 we could see much more rapid growth.”
Consumers have not fully bought into recovery. Heaghney said 2.7 percent current year state sales tax growth is “relatively slow” because consumer discretionary spending stalled due to a decline in disposable personal income. Heaghney predicted discretionary spending growth will continue to be soft after payroll taxes increased for everyone this month and higher income earners also saw their federal income tax rates go up because of the “fiscal cliff” agreement.
Washington is wrestling with several contentious fiscal issues: Mandatory across-the-board budget cuts that could be imposed under sequestration, the unresolved national debt level argument and a continuing resolution that must be passed so bills can be paid. The House will vote Wednesday on a Republican proposal to extend the debt limit discussion by several months in an attempt to work out budget disagreements and Senate Democrats say they will write a budget that further increases taxes.
Agreement reached on the so-called “fiscal cliff” less than four weeks ago now seems almost inconsequential. “We ended 2012 with a very small solution to the overall federal budget problem,” Heaghney said. “The part that was resolved results in higher taxes, payroll taxes and income taxes on high income people. We expect that to be a weight on consumer spending growth and investment growth, particularly in the first half of 2013 while people adjust to the new tax regime.”
Georgia’s pre-recession economy depended heavily on construction. Recession devastated builders and banks. Construction employment was down 18 percent two years ago so by that measurement, last year’s one percent decline is progress. New home construction permits have been trending up since mid-2011. The Atlanta region reported six consecutive months of price increases through November but prices have not rebounded to 2000-year levels.
“The caveat is that we still see very high foreclosure rates even though they are falling,” said Heaghney, “and mortgage delinquency rates are still high, although they are falling.” Heaghney said existing home sales are trending up because of investor group demand for rental property.
“That is the story behind the improvement in housing value that we’ve seen within the metro Atlanta area,” Heaghney said. “It seems they’ve got a lot of money to invest.” Individual buyers are still finding tough sledding. “It is very difficult for non-prime credit people to get a mortgage.” He predicted “a long slide” before the individual homeowner mortgage market loosens up.
Governor Nathan Deal began three days of hearings with brief remarks that recapped priorities in his $40.8 billion Fiscal 2014 proposed budget. The proposal includes $19.8 billion in state dollars and $21 billion in federal funds. Deal reminded legislators that state spending is down 17 percent in a decade and there are 9,000 fewer state employees than five years ago. Deal outlined his priorities last week at “Eggs and Issues” and in his State of the State address.
Appropriations committee hearings Wednesday morning will focus on the adult corrections and juvenile justice systems. All sessions are broadcast live on the House TV website.