New Jersey. Part One: the making of a financial disaster

May 18, 2010

We’ve pointed out how Americans should pay attention to what’s happening in Greece, since it provides useful information about the consequences of bad government policy, in particular of overspending and allowing government debt to get out of control.

Yet we can also learn from the experiences of our state governments.  New Jersey provides a particularly interesting example, so this week we are going to explore what’s happened in the Garden State.  First, we will take a look at the state’s finances.  Like many states (and most Western government’s for that matter) New Jersey has repeatedly expanded government and has been spending more than it takes in as revenue.

For fiscal year 2011, New Jersey faces a budget deficit of $10.7 billion—that’s 36 percent of the previous year’s budget.  Part of that deficit is attributable to a decrease in revenue:  New Jersey, like the rest of the country, lost tax revenue due to the economic down turn.  Total revenue for the state of New Jersey in 2011 is expect to be 15 percent less than it was in 2008. That’s a decline of just under $5 billion.

However, the decline in revenue isn’t the root cause of the crisis: runaway government spending is.  New Jersey’s state spending increased nearly 60 percent between 2001 and 2008.  Even during relatively prosperous years, New Jersey’s debt ballooned from $16 billion in 2001 to nearly $52 billion in 2009.  As a result, New Jersey must use $2.5 billion of its budget just to service debt.

New Jersey’s situation is even worse than these numbers suggest.  In addition to the current deficit and explicit debt, New Jersey faces unfunded pension liabilities of $46 billion.  The state’s pension crisis is another example of lawmakers’ irresponsible spending habits:  liabilities doubled between 1999 and 2008, while the assets grew by little more than a third, leaving a serious financial hole.

While some see tax increases as the way to close these budget deficits, New Jersey already has the highest tax burden of any state in the nation, with a per person state and local tax burden of $6,610.

So, like many governments from Greece to Washington D.C., New Jersey policymakers face the following scenario:  a swollen government budget, declining revenue, growing debt, unfunded mandates, and already high taxes that threaten to discourage productive activity and the economic growth that the state desperately needs.

What path is New Jersey taking to get out of this mess? We’ll address these questions tomorrow, right here on our blog.

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