In the U.S., every state and local government has to operate with a balanced budget. From state governments to the local park boards, that means they may not spend more money than they take in.
It certainly makes sense to use a serious forecasting approach based on generally accepted accounting principles and economic analysis. It is a sound business practice that should be used when building a government budget.
Unfortunately, the model for the North Dakota state budget over the past two biennia has left much to be desired. In the budget period, which ended June 30, the forecasters may have underestimated revenues by as much as a quarter of a billion dollars. That was on a budget totaling only about $2 billion.
Three major factors created this situation. First, oil prices have increased dramatically. In fact, so have all energy prices, including coal - and North Dakota's an energy producing state that taxes energy.
These strong energy prices have added significantly to the state coffers.
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Second, the strong general economy over the past few years has helped, too. That strength occurred across the nation, but it has been especially evident in North Dakota. In fact, North Dakota's economy has been so strong that today we fear a limit on our economic growth because of a shortage of workers.
Third, over this period we've also had a strong farm economy. Farm income has been better than expected, and the farmers have been buying new equipment with that income. That income tax and sales tax collections were higher than projected.
High prices in the farm sector may make accurately forecasting the budget even more difficult. I say "may" because the farmers who are left are very good businessmen. There are indications that they're going to use their extra income to pay down their debt. To the extent they do so, it means sales tax and state income taxes may not grow as much as some expect.
Then again, if the farmers pay down their debt, their income will be higher, and they will pay more in income taxes. Of course, if they buy new machinery, the farmers will have smaller incomes - but the implement dealers will have more and pay more income taxes.
Depending on the income multiplier, income tax collections may be a wash. Sales tax collections could vary depending on whether the farmers buy more machinery or pay down their debt.
Then, too, there is the question about how long the good times on the farm will last. Today's situation is very similar to the one 30 years ago. In the end, that boom only lasted a short time. How long it lasts this time, no one really knows, including, and maybe especially, the firm that forecasts tax revenue for North Dakota.
At least, that is what we should conclude based on their previous projections.
I believe energy prices will remain high. However, energy prices have a high degree of "supply elasticity." That means if there is only a relatively small increase in production, prices could drop quickly and by a lot.
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I am much less sure about the future of the general economy. The so-called credit crunch may drive our general economy down. However, I think the Canadian dollar will become still more valuable in relation to the American dollar, and that means increasing business in North Dakota from the Canadians.
In sum, I believe North Dakota's economy will remain strong even if the American economy retracts.
Maybe North Dakota's income has become so complicated and so dependent on international factors that it is hard to make an accurate forecast. Maybe it is only fair to allow the firm making the projections to provide a two- or even three-scenario forecast.
Of course, if we do that, then where is the value in their forecast? The fact that the job is complicated helps explain the price charged by the forecasting firm. Such firms should be able to provide a high degree of validity in their projections. OMB, the tax department or a small economic consulting firm could easily provide a "maybe this, maybe that" projection, as opposed to one that makes and justifies a core prediction.
Who knows best how to predict North Dakota's tax revenues? I know only this: The projections provided over the past two biennia were too far of the mark. It is no way to run a government.
We would be better served by letting some other firm more familiar with North Dakota try.
Kingsbury may be contacted at Kingsbury Applied Economics by emailing kae@invisimax.com , or by phoning (701) 738-0028.
