Watchdogs: Economic Recovery Will Take Years

Long-shuttered stores may unlocking their doors. And manufacturers are starting to hire employees back to the assembly lines. But the economic recovery might not be a quick one, a state fiscal watchdog group warned Thursday.

The hopes for a sharp and immediate rebound from the COVID-19 shutdown in Massachusetts are no longer realistic, according to the Massachusetts Taxpayers Foundation, which is now predicting a long and slow climb that will strain state resources. State revenues may not fully recover until 2025, MTF said.

The impacts of the economic downturn could be mitigated by tapping into the state's $3.5 billion reserve fund or if Congress sent more relief funding to states like Massachusetts, but even with stimulus the group said past recessions have proven that the state could be in for a multi-year period of austerity.

"To state the implications straightforwardly: the Commonwealth will have limited budgetary flexibility for the next several years as tax revenues slowly rebound, particularly if the demand for safety net services resulting from an ailing economy and an aging population drive up expenditures," MTF said in the report.

The paper published Thursday was a follow-up to the foundation's report earlier this month downgrading its revenue estimates for the fiscal year that begins July 1 to reflect an anticipated $6 billion drop in projected tax collections. The foundation's newly pessimistic outlook on the length of the recovery is based on what it said was the severity of the decline and the widespread and fundamental changes the pandemic has wrought on pillars of the state's economy, like higher education and tourism.

After economic downturns in 2002 and 2009, the MTF analysis found that it took the state's economy three years before tax revenues rebounded to their pre-recession levels, making it "reasonable" to assume it would take at least as long this time for revenues to fully recover.

"When the potential structural changes to key pillars of the economy are considered, it could take considerably longer for the state to recoup tax revenues lost from this pandemic," the paper stated.

In the recession of the early 2000s, tax revenues fell 14.6 percent before they started coming back up, and at their low point in fiscal 2009 revenues were off 12.5 percent from their peak before the Great Recession. In that last recession, legislators turned to a 25 percent sales tax increase to prop up state spending, but even with that additional $1 billion in new revenue it took until fiscal 2012 for collections to rebound fully.

If tax revenues grew at 6 percent a year beginning in fiscal 2022, MTF said it would take until fiscal year 2025 - which begins July 1, 2024 - for revenue to fully recover, assuming a drop in tax revenues of 20 percent or more in the near term. That rate of growth would also be one point higher than the average rate of growth over the past decade.

The report said medical and economic experts now agree that a full recovery will not occur until there is a widely distributed vaccine, and MTF is no longer holding out for the possibility of a "V" shaped recovery, which would indicate a sharp rebound back to pre-pandemic economic activity.

The consensus now, MTF said, is that the recovery will like look more like a "U" or even and "L," and if a second surge of the virus occurs in the fall there could be peaks and valleys like a "W."

The Congressional Budget Office is using a new metaphor - the Nike "Swoosh" - to described what the recovery might look like on a graph.

"Key sectors of the Massachusetts economy, including health care, higher education, tourism, and commercial real estate, will likely emerge from the pandemic fundamentally altered and those changes could further prolong the time it takes for the economy to bounce back," the report said. "A complete and accurate picture of the state's budgetary challenges may elude us for some time."

Legislative leaders on Beacon Hill have been waiting and watching the trajectory of the COVID-19 pandemic, as well as the Baker's administration's approach to reopening as they try to put together a plan to tackle the state budget for fiscal 2021. The process is already well behind schedule, and leaders like Speaker Robert DeLeo ad Senate President Karen Spilka have hinted that they might try incremental budgeting, rather than trying to develop a year-long spending plan for July.

"The Massachusetts Taxpayers Foundation's latest forecast for a longer, slower recovery is consistent with what I am hearing from other economists, and I agree with that assessment," Senate Ways and Means Chairman Michael Rodrigues said in a statement to the News Service on Thursday.

"The biggest unknown is what will happen this fall, as a resurgence of the virus would send even this projection into upheaval," Rodrigues said.

The next move on the annual budget belongs to House Ways and Means Chairman Aaron Michlewitz.

"The Mass Taxpayers Foundation report signifies that our budget road is going to be long and challenging. We will need to be flexible on all fronts knowing that the difficult decisions do not end with FY21," Michlewitz said in a statement Thursday.

Revenues in April missed budgeted projections by $2.17 billion, with a substantial portion of the decline attributed to the delayed income tax filing deadline. Half way through May, tax collections of $794 million for the month where down another 16.7 percent from a year before, though state revenue officials consistently caution against using mid-month reports to project full month collections.

While income taxes were down $84 million, or 12 percent, through May 15, withholding taxes were actually up $59 million from mid-May 2019, due in part to taxes withheld on unemployment insurance benefits.

Sales taxes were down almost 38 percent, but the Department of Revenue said that most payments are not due until after May 20 and may not come in at all this month due to extensions given during the health emergency.

The Taxpayers Foundation said the "willingness of Congress and the administration to keep state and local governments functioning" will play a big role in determining how state services are impacted.

Massachusetts is in line to receive $2.6 billion in federal relief funding through the CARES Act, and House Democrats passed another round of spending that could send an additional $500 billion to state governments.

While the next round of stimulus has stalled in the face of opposition from Senate Republicans and the White House, Federal Reserve Chairman Jerome Powell warned earlier this month that loans from the federal government to states and businesses can be a bridge, but may not stave off solvency problems down the road.

"Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This trade off is one for our elected representatives, who wield powers of taxation and spending," Powell said in a speech on May 13.

The Taxpayers Foundation said rebuilding consumer confidence will also play a big role in how the state comes out of this recession.

"Ongoing adjustments will be necessary as we follow the trajectory of the virus, the timing of a vaccine, the ability of the economy to regain traction and consumers to regain confidence through inevitable fits and starts," the report said.