How Will Federal Economic Policy Impact Connecticut? – Milford-Orange Times

By Kevin Mcnabola
Orange Board of Finance

Kevin McNabola

Moody’s Investor Services recently announced that federal debt, pensions and other post-employment benefit liabilities have increased over the past year in Illinois, Connecticut, New Jersey and Kentucky. However, there is some good news regarding rising revenues in New Jersey and Connecticut, which now have over $3.1 billion in fiscal reserves. Connecticut has taken the right steps to manage its long-term financial commitments and prepare for the approaching economic storm that is sure to be tough based on current Federal Reserve economic policies.

Connecticut’s fiscal reserve is credited to a strong stock market and rising state income and business tax revenues, which contributed to Connecticut’s first credit upgrade in over two decades. The credit rating of the general obligation rose from A1 to Aa3. Because of the cap and size of our fiscal reserves, the state has been able to repay $1.6 billion of its long-term unfunded pension obligations to put the state on a more sustainable path.

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However, it’s worth noting that the economic policies of both the Federal Reserve and the Treasury over the past 18 months have threatened Connecticut’s recent gains and fiscal sustainability.

Based on the current economic headwinds Connecticut is facing today, with rising interest rates, inflation and wage pressures, the Fed should have taken steps to follow the economic policies of President John F. Kennedy, the first supply-side president. Kennedy implemented sweeping tax cuts across the board in 1962, resulting in gross domestic product growth of 6.1 percent in the first year and averaging 4.9 percent for the remainder of the 1960s.

President Ronald Reagan introduced a similar policy in 1982, which included free market principles of limited government, deregulation, lower taxes and a strong dollar. Reagan’s actions in 1982 resulted in tax cuts and long-term economic growth (4.4 percent growth from 1983 to 1990 and continued growth into the 1990s).

Recent Fed policy has turned a strong, zero-inflation economy into a steep decline in inflation in just over a year. Federal policy on fossil fuels has pushed up gasoline, oil, natural gas and coal prices, not to mention food prices. Within the past year, Americans have seen a tax hike and the biggest regulatory assault on business we have ever seen, with real working-class wages falling steadily. Trillions of dollars in federal spending hit an economy already recovering strongly from the pandemic with a tight labor market. The Federal Reserve kept the spigots open for too long, in part to fund the borrowing needed for all spending. Based on the Fed’s actions, it’s easy to argue that the current US inflation rate of 8.3 percent was predictable.

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Connecticut’s financial health is the strongest it has been in decades. However, Fed policy will result in weaker stock market returns and government revenues, along with business tax revenues that will plummet over the next year. Ultimately, these lead to deficits and the inability to provide additional funds specifically for the repayment of long-term liabilities.

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Connecticut still ranks among the top five states with the highest long-term debt due to decades of financial mismanagement and rich defined-benefit pension plans for state employees. However, Gov. Ned Lamont has done much to change that by working to put Connecticut on the path to fiscal sustainability. He managed a $3.7 billion deficit he inherited and invested in paying off pension obligations with budget surpluses.

The cost of servicing pension debt will continue to weigh on states like Illinois, Connecticut and New Jersey for the foreseeable future. However, Connecticut has started paying off its obligations and is in better shape than most states. The fact remains that Connecticut’s biggest economic challenge in the near term will be competing with poor Fed policy that didn’t work in the 1970s and won’t work today.

Kevin McNabola is the City of Meriden’s Chief Financial Officer and a member of the Orange Board of Finance.

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