Booming State Budget Growth is Headed for a Slowdown

Governors are calling for a 4.2% increase in state general fund spending, down from the 13.6% this year, according to a new report.

Governors are calling for a 4.2% increase in state general fund spending, down from the 13.6% this year, according to a new report. Blake Callahan via Getty Images

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Governors are calling for a 4.2% increase in general fund spending, compared to 13.6% this year, according to a new report.

Governors anticipate another year of increased state government spending, but not the gangbusters growth that they saw this year.

All told, governors’ spending plans across the country call for a 4.2% increase in spending from state general funds, the accounts that typically make up the bulk of a state’s budget. That’s down from the 13.6% increase states saw in the same spending category from last year to the current year, which was the highest annual increase in more than four decades, according to a new report from the National Association of State Budget Officers. 

Governors in 36 states projected spending increases next year, while executives in 13 states forecasted declines, according to the latest edition of the group’s semi-annual Fiscal Survey of the States.

But the survey could underestimate the size of the increase in general state spending next year, said Shelby Kerns, NASBO’s executive director, because many states have revised their projected revenues for next year since the group collected its data.

The survey is based on proposals put forward by governors in late 2021 and early 2022. Those gubernatorial plans, and the assumptions that go into them, can change significantly by the time legislatures pass their budgets.  

“Enacted budgets for fiscal 2022 ended up being considerably larger than what governors proposed, thanks to upward revisions in revenue projections,” NASBO wrote in its report. “It is possible that this could happen to some extent again for fiscal 2023 enacted budgets, as revenue collections have been running ahead of the forecasts used in governors’ budgets for most states.”

A Record Year 

The projection for next fiscal year would be a return to a typical one, following almost unprecedented growth in the current year.

The budget officers projected that by the time most states close their books on fiscal year 2022 at the end of this month, general fund spending will top $1.05 trillion nationally.

The 13.6% increase over the previous year is the fastest growth rate NASBO has documented since it began its survey in 1981.

NASBO attributed the explosive growth in 2022 to several factors, including:

  • States spending surplus money they accumulated since the onset of the pandemic on one-time expenses.
  • Proactive budget cuts several states took in the spring of 2020, in anticipation of economic upheaval caused by Covid-19. Those actions lowered the baseline of spending in FY 2020, which made increases the following year look more dramatic.
  • Inflation, although that does not explain the entire increase. Even adjusted for inflation, general fund growth is projected to be 7% this year.

This year, no states reported making midyear budget cuts, which states often have to do if they see revenue unexpectedly drop after a budget is passed. In fact, 22 states this year said they made middle of the year adjustments to increase spending.

Looking Forward

As governors made their plans for the year to come, potential strains to the economy loomed large. Inflation, especially for goods tied to fuel prices, is soaring worldwide and sapping consumer confidence. A tight labor market, covid surges and logistical challenges for manufacturers have all added to the strain.

Governors sought to ease the burden on consumers by proposing tax cuts. Across the country, those proposals would amount to a loss of $14.1 billion in general funds, according to NASBO.

The state executives also tried to brace themselves for another potential economic downturn, by adding to their fiscal reserves. A majority of the state budget proposals included new money to rainy day funds, which is significant because states have increased those reserves from $77 billion in 2020 to an anticipated balance of $132.2 billion at the end of June.

“States have been focused on how to effectively and sustainably spend one-time funds they have from revenues exceeding forecasts. It has allowed states to better position themselves in the future by making investments and saving for future downturns” said Kate Nass, Oregon’s deputy chief financial officer and NASBO president, in a statement.

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