It doesn’t take an economist to know that inflation is still causing pain for Virginia families: a trip to the grocery store is more than sufficient. But some numbers demand discussion.
Recently, the U.S. Department of Labor released inflationary figures for April 2023. The month’s increase of 0.4% (about a 5% annual rate) reflects just how difficult it has been for the Federal Reserve to achieve a 2% annual inflation target through monetary policy. Inflation, which reached a 40-year high of 9.1% in June 2022, is responding slowly to Fed action. The Consumer Price Index and other data points lead market watchers to expect an 11th consecutive increase in the target rate for Fed Funds Rate, bringing the upper target to 5.5%.
How did we get here?
To answer this question, one needs to look squarely at the federal government. In the past three years, Congress has literally dumped trillions of dollars into our economy. Demand swelled while labor force participation declined. Eviction moratoriums, enhanced unemployment payments and expanded government support for healthcare, rent and food made the necessity of having a job a little less important to many citizens.
The resultant labor shortage pushed up wages at the fastest clip since the early ’80s and the cost to produce a product or deliver a service saw corresponding increases. Home prices, rents and a trip to the grocery store left Americans shaking their heads and worrying what comes next. The Federal Reserve seemed almost powerless compared to the tremendous impact of COVID-19-directed fiscal stimulus. The sad part of this story is that anyone with an ounce of sense could have foreseen our current predicament.
Congressional actions often have winners and losers. While our country as a whole is clearly a loser, state and local treasuries are among the winners. Growth in state and local government revenues (both tax receipts and federal grants) have made politicians giddy with excitement. All too often, they are more than happy to spend their windfalls, albeit sometimes with some token tax reduction, but always with a statement congratulating their fiscal prowess.
In Virginia, we can and have done better.
In the two budget years since COVID struck, Virginia experienced a 36% increase in state revenues. Our leaders, in crafting our current two-year budget, were committed to put the brakes on this growing burden, and protect our citizens and business.
While great efforts were expended to conservatively forecast revenue, equally great efforts were made in 2022 to return nearly $4 billion of surplus tax receipts to our taxpayers. Republican and Democratic legislators united in a bipartisan effort to keep Virginia affordable.
We are now 10 months through the first year of the two-year budget adopted last year, and it is evident that we will achieve and likely exceed our original forecasted revenue by as much as another $2 billion. With enhanced revenue clarity, Gov. Glenn Younkin has provided proposals to change our second budget year to enhance mental health treatment, improve funding for schools and police and, yes, provide Virginia with an additional $1 billion of tax relief.
His proposals passed through the Republican House, only to fail in the Democratic Senate. Because of the two-year cycle, Virginia has a budget for the new fiscal year and because of the continued revenue surge, the modest tax cuts for the second year that never passed remain easy to accomplish with no need to cut spending.
In fact, second year spending will grow. Now that Congress seems to have gotten its act together, at least a bit, what is the reason for the continued delay in Virginia?
Gov. Glenn Youngkin should call the General Assembly back into session and encourage us to find common ground. I believe we are up to the challenge, and our citizens deserve no less. The argument that Virginia cannot afford both strategic investment and tax relief simply does not hold water.