Connecticut is on track to end fiscal year 2015 with a $70.9 million deficit, according to state Comptroller Kevin Lembo.
But Lembo cautioned that revenue that comes in through the end of August will be applied to the 2015 deficit, so there’s a chance the final number will improve.
Ben Barnes, secretary of the Office of Policy and Management, estimated at the end of July that the state could realize an additional $900 million in revenue through August 7.
The state won’t officially close the books on 2015 until September.
Lembo also noted that if there is a deficit at the end of August, it will be closed with money from the rainy day fund.
In his monthly letter to Gov. Dannel P. Malloy, Lembo agreed with the Office of Policy and Management’s latest deficit estimate, which is $44.8 million below last month’s estimate.
“The slow growth in General Fund revenue during the 2015 fiscal year produced significant budget challenges in order to mitigate a sizeable deficit,” Lembo wrote Monday. “Active budget management held spending growth to under 3 percent in Fiscal-Year 2015 compared to last fiscal year, which brought the deficit to 0.4 percent of the funds operating dollars.”
Lembo said the administration tried to reduce the deficit through managing spending, but “there is a great need to evaluate and address persistently slow wage growth,” which contributes to lower-than-projected revenue estimates.
“Despite significant job growth during FY 2015, the payroll-driven withholding portion of the income tax has failed to generate the anticipated gains,” Lembo said.
The state comptroller pointed to a study by the Federal Reserve Bank of Cleveland, which found a correlation between wage growth, productivity increases, and labor’s share of income.
“The study is saying that a declining trend in the hourly output of workers, along with businesses opting to invest more heavily in capital equipment and other non-payroll spending has depressed wage growth,” Lembo said. “If businesses can effectively substitute equipment, technology or outsourcing for local workers, then there is no need to increase wages to attract or retain skilled labor.”
It’s a trend of businesses investing more in automation than in a skilled workforce.
“The state must seriously consider and explore the many possible policy remedies — because, while jobs continue to grow, so must wages,” Lembo said.
State spending is $144.5 million below initial budget projections and income tax revenue fell $110.5 million short of projections.
The most significant revenue increase is in the corporation tax, which is expected to exceed the initial budget amount by $107.7 million. Expanded tax credits were projected to reduce corporate payments during the fiscal year; however, the corporation tax is now estimated to grow 3.8 percent over last fiscal year. Lembo said the growth is, in part, attributable to the Department of Revenue Services’ initiative to settle outstanding corporation tax issues, which resulted in a gain of $31.6 million in this area.
“As I have been reporting, the state’s overall economic climate has been gradually improving,” Lembo said.
Senate Republican Leader Len Fasano was critical of the Malloy administration for the deficit.
“Gov. Malloy campaigned on a promise that the state wouldn’t have a deficit to end the fiscal year in June,” Fasano said in a statement. “It’s August, and we have a deficit. Our state’s emergency money will soon be tapped to fix the problem. But, as the governor has said, he owns this budget. He also owns the tax hikes that he said we wouldn’t have.”
Fasano has maintained that Democrats ignored the 2015 deficit until it was too late to correct.
Malloy has maintained that it’s possible the state won’t end the year with a deficit and the state will take in enough money in August to balance the books before official end of the fiscal year in September.