CGFA releases FY21 economic forecast

The report, by the Commission on Government Forecasting and Accountability (CGFA), looks at statewide economic trends and their effects on the State of Illinois’ FY21 budget.  The report was presented to the twelve-member, bipartisan CGFA panel on March 4. 

There has been a good deal of talk in recent days about the impact of the current COVID-19 contagious virus and its possible effects on the global economy.  That being said, the trend line picture CGFA presented to the General Assembly this week was one of continued slow growth.  Since 2015, the GDP growth rate posted by the U.S. economy on a nationwide basis has grown at a steady rate averaging 2.0% per year.  Quarterly-measured U.S. and Illinois economic growth has been matched by new hires, with unemployment numbers hitting record low levels in many regions of Illinois and the nation.  The steady growth rate is being managed by central bankers in ways that are preventing a renewal of consumer-goods price inflation, with the U.S. Consumer Price Index (CPI) showing inflation of approximately 2.0%/year.  Much of the remaining U.S. price inflation is concentrated in demand-inelastic service sectors of the economy, led by health care.  Durable goods, on which sales taxes are charged in Illinois, continue to be good buys, and Illinois sales tax revenues remained strong and healthy s of February 2020.          

Interest rates are headed toward record lows.  When the CGFA report went to press, U.S. 10-year Treasury notes were trading in a band bounded between 1.50% and 1.75%.  Since publication of the report, the U.S. Federal Reserve has taken action to reduce the T-note rate by a further 50 basis points, to 1.00% – 1.25%.  Interest rates in these key benchmark securities help to fix the rates charged by lenders who offer home loans and refinancings, indicating a continued positive climate for new-home purchases and associated Illinois variables that include changes in the current market value of real property. 

Many sub-regions within Illinois have been negatively affected by continued trends away from manufacturing and away from export-oriented manufactured goods.  About 590,000 Illinoisans work in manufacturing today, down from 680,000 in 2007.  Illinois manufacturing employment remains depressed in relation to where it was prior to the 2008 global economic downturn.   These trends are especially relevant to many metropolitan areas within Downstate Illinois that have traditionally tied their job creation and employment activity to “heavy industry.”  The trends also help explain some of the underlying causes behind overall population declines in many regions within Illinois.  Although Illinois is currently, overall, a prosperous state, our population is shrinking, both in real terms and in relation to fast-growing U.S. states such as Florida, Georgia, and Texas.  Global job creators do not see Illinois as a place that is growing as a market for new jobs and new business. 

Combining the potential economic impact of COVID-19 coronavirus, the continuing image of Illinois as a high-tax state, unknown costs associated with an ever-increasing minimum wage, the uncertainty voters will approve the graduated income tax this fall, and significant fixed costs relating to an aging population and outdated model of economic activity and productivity, results in significant economic headwinds in FY21. These factors signal the urgent need for an FY21 spending plan that reflects realistic revenue projections based on current law in an effort to mitigate the potential negative effects of the economic uncertainties outlined above.

CGFA’s FY21 revenue estimate of $40.645 billion is close, in some categories, to the estimate provided by the Governor’s Office of Management and Budget (GOMB) as part of the Governor’s FY21 proposed budget.  However, and significantly, CGFA’s overall FY21 revenue estimate is $51 million lower than GOMB has presented for FY21.  CGFA expects personal and corporate income tax receipts to be roughly $217 million higher than GOMB anticipated, however those gains are then lost over several other General Revenue categories, including sales taxes (-$47 million), public utility taxes (-$10 million), inheritance tax (-$10 million), and a handful of other sources (-$99 million).

Additionally, CGFA’s projections assume that the income tax transfers to the Local Government Distributive Fund (LGDF) and sales tax transfers to Public Transportation Funds (PTF/DTPF) will be restored to the full amount owed as outlined by statute. This assumption results in a $91 million decrease in available General Funds when compared to the Governor’s proposal – which is to maintain the 5% diversion of income and sales taxes owed to local governments.

CGFA’s FY20 revenue projection revisions lowered our base General Revenues by $58 million for the current fiscal year, when compared to estimates from March of last year.  CGFA noted that these estimates are tentative and could change rapidly based upon unexpected factors in April 2020 income tax payments.