Leading economists say
operating budget will
put state in red

By Mike Yuen
Star-Bulletin

The two-year, $12 billion operating budget that the Legislature approved earlier this month does not meet the state constitutional requirement for a balanced budget, say the isles' top economists who forecast state revenue income.

But at their meeting yesterday, members of the state Council on Revenues were less concerned about the legal implications of state spending not corresponding to state revenue collections. Instead, they were more focused on how the imbalance would impact the state's revenue flow.

They also wondered if the course the Cayetano administration and lawmakers are following could lead the state to a much darker economic situation than what it is already confronting.

Tax cuts have been approved to stimulate the state's anemic economy, but government spending is still going up, they noted.

"The problem is the imbalance you have -- in addition to being unconstitutional -- will catch up eventually because the ability to finance (government spending) is finite," said Bank of Hawaii chief economist Paul Brewbaker. "When does that hit? (The Department of) Budget and Finance says we can get away with it; we got away with it last year. The Legislature seems to be saying we can get away with it two more years."

Bad breaks?

Four-year cuts totaling $750 million in state personal income taxes began this year and lawmakers this month approved legislation aimed at limiting the repeated imposition of the general excise tax on goods and services, which will save taxpayers $150 million over seven years.

Brewbaker and his colleagues said the state is on course to being in the red by about $150 million a year from its tax breaks if there are not any corresponding cuts in government spending.

Brewbaker added that the budget passed by the Legislature calls for a 4 percent to 5 percent increase in expenditures in the two fiscal years that begin July 1. It has no correlation to what the council forecast -- minus 1.6 percent growth in fiscal 2000 and plus 2.0 percent in 2001, he said.

"The real importance of that is not that we're constitutional lawyers and that we're going to call the constitutional police. It is that it might change the revenue forecast," Brewbaker said.

In the short run, the state may get an economic boost. But there could be a serious downturn in later years, said several council members.

Robert Clarke, chairman of Hawaiian Electric Industries Inc., said the tax cuts are being funded by raids on special funds, and that can't continue indefinitely.

'Shell game'

"It's a shell game," said Carl Bonham, an associate professor of economics at the University of Hawaii.

House Speaker Calvin Say (D, Palolo) has said he believes the state can get through the next fiscal biennium. But it is the state's fiscal picture in subsequent years that concerns him.

House Minority Leader Barbara Marumoto (R, Waialae Iki), a member of the House Finance Committee, said House and Senate budget conferees were looking for "some reductions in the total bottom line" but it didn't happen.

She added she hopes that the budget "was constitutional at the time we passed it. I'm sure the attorney general would look at that issue. ... We need the budget on July 1, so people can get paid."

Senate Ways and Means Co-Chairwoman Carol Fukunaga (D, Makiki) could not be reached for comment yesterday.

Michael Sklarz, chairman of the Council on Revenues, said if the isle economy turns around, that would spare the state from an economic judgment day.

Sklarz said that in the early 1990s, there were fears that the U.S. government was headed for a fiscal disaster in which it would drown in red ink. But two years ago, the federal government began running surpluses, he added. That could happen in Hawaii, Sklarz said.