Metrowest Daily News: Virus leaves economists uncertain of final toll

https://www.metrowestdailynews.com/news/20200419/virus-leaves-economists-uncertain-of-final-toll

By Colin A. Young, Chris Lisinski and Katie Lannan / State House News Service

Posted Apr 19, 2020 at 12:01 AM

BOSTON — As Massachusetts budget managers gathered Tuesday morning to begin to figure out how the coronavirus pandemic will affect the state budget picture, the International Monetary Fund published a report that made clear that the virus has created a global financial crisis that is expected to do more harm than the 2008 recession.

“It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago. The Great Lockdown, as one might call it, is projected to shrink global growth dramatically,” the IMF wrote in its latest world economic outlook. “A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound. Much worse growth outcomes are possible and maybe even likely.”

The IMF projects that the global economy will “contract sharply” by 3% in 2020, which the organization said would be “much worse than during the 2008-09 financial crisis.” For the United States’ economy specifically, the IMF’s outlook projects a contraction of 5.9% in 2020.

But the IMF report also looks ahead to 2021 and projects global economic growth of 5.8% and U.S. economic growth of 4.7%, assuming that the pandemic fades in the second half of 2020 and social distancing measures that have kept businesses closed and hampered consumer spending can be gradually eased.

A panel of economic and fiscal experts briefed lawmakers and Baker administration officials on the likely ramifications of widespread business shutdowns and deep job losses in the Bay State. There was some overlap in projections, but the forecasts differed in key ways for a reason each presenter acknowledged: this is an unprecedented situation and the virus doesn’t play by typical economic rules.

Mass. Taxpayers Foundation

Tax collections that lawmakers had hoped would propel big investments in education and transportation this year are now projected to fall by $4.4 billion, or 14.1% below the benchmark that top budget officials agreed to back in January, according to an analysis by the Massachusetts Taxpayers Foundation.

According to MTF, sudden and massive layoffs are pushing the unemployment rate up to nearly 18% in the current quarter, with 570,000 jobs expected to be lost in just three months, including many in the leisure and hospitality sectors. The total number of people unemployed in Massachusetts is poised to peak at roughly 677,000 by the end of this quarter.

MTF President Eileen McAnneny said it is projected that Massachusetts will recover 410,000 of those jobs during fiscal year 2021, which begins July 1, and that the unemployment rate will drop back down to 7% one year from now and further decline to 3.9% by the end of calendar year 2021.

The suddenness and speed of the economic decline is unprecedented, McAnneny said.

“The economic and fiscal fall-out from the pandemic puts an unprecedented strain on the state’s budget and resources, surpassing previous fiscal crises because of its sudden and steep onslaught,” she said. “Although alarming, MTF’s projected shortfall does not represent a worst-case scenario. In fact, we project a recovery beginning in July. Should the size, scope or duration of this public health crisis grow, the numbers would have to be revised to reflect the deteriorating economic outlook.”

What shape that recovery will take was a key theme to Tuesday’s hearing. Several analysts used the shape of letters to outline possible economic recovery trajectories. The letters are V, U, L and W.

If new cases of COVID-19 peak in April or early May and subside during June, McAnneny said, “a recovery could start in early July with a V-shaped growth spurt in quarter one of FY2021 due largely to pent up demand.”

But if the re-opening of the economy is delayed because new virus cases don’t peak until summer and don’t recede until fall, or if a second wave of the virus forces another round of shutdowns, the recovery will follow something more like a U shape, MTF said.

MTF summed it up in its analysis: “Either way, a return to pre-pandemic employment levels of Q1 2020 will take several years to achieve.”

Beacon Hill Institute

Beacon Hill Institute experts warned that already-dramatic job losses both nationwide and in Massachusetts could become “a lot worse” in coming months as more businesses feel the strain of forced closures and plummeting revenues.

In calendar year 2020, BHI forecast that the unemployment rate in Massachusetts will rise to 14.7%, state GDP will decline 7.2%, and tax revenues will drop 20%.

Analytics suggest Massachusetts has been losing about 30% of its daily GDP at the current rate, BHI Director of Research William Burke said.

Burke and BHI President David Tuerck noted, as did several other speakers, that projecting full impacts is difficult because of uncertainty about how long the pandemic will last. The damage will become more intense the longer the public health crisis continues, Burke said.

“At this point, we believe that the global and U.S. economy will face a deep recession,” Burke said. “If the pandemic sustains for a deeper period of time, through the calendar year, there is a chance the global and U.S. economy could see depression-level job losses.”

Mass. Budget and Policy Center

The state will need to tap into its rainy day fund and should also reconsider some tax breaks and work to ensure it receives as much federal relief money as possible, Massachusetts Budget and Policy Center President Marie-Frances Rivera said.

The economic ramifications of the pandemic have left many people out of work and struggling to afford housing and other basic needs, Rivera said. She said the state must make sure it continues to fund key services and that systems people rely on – like transit, education and unemployment insurance – remain operational.

“Now is not the time to switch into austerity mode, so we have to utilize all the tools that we have in our toolbox,” Rivera said.

Download tape

If patterns from past recessions hold, Rivera said, fiscal 2020 tax collections would fall somewhere between $4.2 billion and $4.9 billion below fiscal 2019 collections and, with limited growth, collections in fiscal 2021 could land between $5 billion and $5.7 billion shy of the estimates budget writers agreed to in January.

Rivera said state officials should identify ways to limit near-term tax losses “so we can invest in people now and into the future.” MassBudget’s written testimony said the “best, first option” for doing so would be “to delay, down-size or eliminate several of the largest and most wasteful tax breaks and tax loopholes in our state tax code.”

Specific tax policies Rivera flagged for reconsideration included the film tax credit, the “single sales factor tax break,” and a not-yet-implemented new state charitable deduction.

She thanked budget writers for building up the state’s rainy day fund in recent years. “Our recommendation would be – it’s pouring,” Rivera said. “We need to use it to make sure we have vital services covered. These dollars must be accessed.”

Michael Goodman

Michael Goodman, co-editor of MassBenchmarks and executive director of the Public Policy Center at UMass Dartmouth, flagged for the budget managers a key vulnerability he sees as he thinks about the Massachusetts economy and how it might fare through a global pandemic.

Massachusetts has come to lean on a couple of large sectors of its economy for reliable growth and stable jobs – “the eds and meds,” he said, referring to higher education and the health care sector.

“If you look at the tale of tape for Massachusetts over the last couple of decades, you can see that even through some of the worst economic experiences that we’ve had, our health care institutions have grown and added jobs. Similarly, higher ed has had its challenges during downturns, but both have been stalwart counter-cyclical employment stabilizers,” he said.

But that might change during this pandemic since elective procedures and other health care procedures have been called off, threatening “to blow a very large hole in the fiscal model, the financial and budget model, for our larger and not-so-large health care systems throughout the state,” he said.

“I have grave concerns about health care without additional public support,” Goodman said.

With students sent home from college campuses this spring, universities have shifted to remote learning and it’s unclear when it will be safe for students, and the higher education institutions they attend, to return to the old way of doing things.

Alan Clayton-Matthews

Alan Clayton-Matthews, a Northeastern University economics professor and senior editor at MassBenchmarks, presented a forecast that estimated state tax revenues for the current year to come in at about $29.7 billion – which would be virtually no change over last fiscal year – and that state revenues in fiscal 2021 will come in around $26.1 billion, down 12% over his fiscal 2020 projection.

Without the COVID-19 pandemic, Clayton-Matthews said his modeling projected FY20 state tax revenues at $30.6 billion and FY21 tax revenues at $32.1 billion. He also added that he thinks his model might be “over-predicting the revenue fall by about $1 billion” in FY21.

His forecast assumes that 20 percent of the state’s workforce will be unemployed, furloughed, on leave or will have dropped out of workforce by June. Another 45 percent of the workforce by June will be working from their office or worksite, and 35 percent will be working from home, according to his assumptions. He projected the number of unemployed Bay Staters will peak at 875,000 in July.

Massachusetts taxpayers stand to benefit to the tune of $5.5 billion from the federal stimulus checks that should soon start hitting bank accounts, Clayton-Matthews said, but that will not translate into a direct benefit for state coffers.

“People will have more money to spend and that could affect taxes that depend on spending, like sales taxes and excise taxes,” he said. But the stimulus checks are not taxable under Massachusetts law, “so revenues won’t be positively affected by these stimulus checks directly.”

Clayton-Matthews said the economy will come back to about where it was pre-virus by end of calendar year 2021, depending on the success of mitigation strategies, the development of a vaccine and more.

“This bounceback is not quite V-shaped but its close to V-shaped in this assumption and it’s a fairly optimistic assumption,” he said.

Tufts University Center for State Policy Analysis

One of the newest figures in the economic expert circuit, Tufts University Center for State Policy Analysis Executive Director Evan Horowitz, said he is “more optimistic” about outcomes than some of the others who testified Tuesday even as he projected a revenue shortfall over the next 15 months at least $2.5 billion below state benchmarks.

While the figures are dramatic, Horowitz said the scale of governmental response “is much closer to economic need this time than it was in 2008,” specifically noting congressional action on relief packages, expanded unemployment benefits, and several measures by the Federal Reserve.

“The fact is the recessionary cycle should be blunted,” Horowitz told state officials. “It’s not that this will prevent a recession, but it brightens hope for a medium-term recovery and should factor into any estimate.”

Should federal support prove inadequate, he said, any withdrawal from the Massachusetts rainy day fund will need to be carefully calibrated to keep reserves at a sufficient level to weather a lengthier economic downturn.

The CSPA estimates total state tax revenues in fiscal year 2020 will wind up $500 million to $700 million below the most recent benchmark, a figure that does not account for hundreds of millions of dollars that will be deferred because leaders postponed the tax filing deadline from April 15 to July 15.

In fiscal 2021, he said, Massachusetts could fall roughly $2 billion below consensus revenue estimates, but that estimate is less clear because of uncertainty about how the nationwide recovery process will look.

State tax revenues correlate almost one-to-one with national GDP growth, Horowitz said. The 25 to 35 percent economic contraction some experts expect in the next three months will likely accompany an “equally sudden and severe” drop in revenues.

Horowitz also urged lawmakers to prepare for a significant shift in spending priorities as the pandemic unfolds. The rest of FY20 will likely feature urgent spending on health care, he said, but issues that today may seem distant — such as a “wholesale rethinking of how we vote in Massachusetts,” colleges at risk of collapsing without tuition, and K-12 educational inequities — could require attention in FY21.

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