Chapter 2: Illinois' Fiscal Future and the State's Economy
Authors: Richard F. Dye and Daniel P. McMillen, IGPA faculty.
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This chapter examines the relationship between the state of Illinois' budget and the state’s economy – how each affects the other and what the implications of these relationships are for the future of Illinois’ economy. Illinois’ state budget has faced a long-standing structural deficit, which means that in order for the budget to become balanced, unpopular political choices must be made.
Even though the state had an opportunity in 2003 to use increasing revenue and an improving economy to help stabilize the budget, these changes were not made, and ultimately balancing the budget every year required rolling spending into following years. Currently, the budgetary situation in Illinois is severe, and it may worsen in the future because of three factors.
- First, because state revenue is so closely tied to the performance of the economy, revenue will fall as the economy declines.
- Second, revenue and spending obligations in the state might grow at different rates, and if spending obligations outweight revenue the state will face an even larger structural deficit.
- Finally, changing demographic factors in the state will affect both revenue and spending in the long term.
Cyclical deficits continue to harm the state’s budget by reducing revenue on the one hand and decreasing the value of investments assets held for pensions on the other. Moreover, structural deficits continue to plague the budgets because revenue continues to fall deeper and deeper below the level of expenditures. Finally, the changing age distribution of both the residents of Illinois as well as the nation promise to augment the problems of cyclical and structural deficits. Changing patterns of consumption, taxation, and a shrinking labor force all contribute negatively to the state’s ability to gather adequate amounts of revenue.
The authors illustrate the link between the budget and the economy by using the example of budgetary spending on transportation infrastructure in the state and how it influences the state’s economy. They find that the most important transportation infrastructure in the state is highway development, and that increasing highway usage in the City of Chicago has spurred several new sources of revenue for the state, including revenue from the taxation of motor fuel.
Nevertheless, the authors note that taking the entire picture of transportation infrastructure together, facts like the increase in the use and cost of motor fuel actually deepens the financial problems Illinois transportation institutions find themselves in.
The authors propose three policy solutions to the ongoing fiscal and economic crisis in Illinois:
- More efficient use of transportation infrastructure, including ongoing maintenance and efficient management of traffic.
- Joining 38 other states in taxing retirement source income as the state’s population ages.
- Using more and better information in the formulation of the state’s fiscal future, which currently gets formulated as policy-makers watch events unfold.
Using several resources and strategies in the state, the authors suggest that better information about fiscal options will result in better policy decisions for the state.
