(The Center Square) — Despite Pennsylvania’s surging tax collections in recent years, one state agency warns that a budget deficit lies ahead, complicated even more by a shrinking labor force.
The Independent Fiscal Office’s economic and budget outlook for the next five years expects the deficit to rapidly expand from $624 million in the current fiscal year to more than $4 billion by 2028 as average spending outpaces tax revenues.
“The projected deficits are sufficient to eliminate the combined General Fund and Rainy Day Fund (includes interest accrual) balances by the end of the forecast period,” the report noted.
The latter includes $6.1 billion in emergency funds meant to sustain government operations during periods of economic turmoil. Treasurer Stacy Garrity says it’s enough money to keep the state running for 48 days – 3.5 days above the national median.
The combination of declining revenues, due in part to the state’s reduction of its corporate net income tax rate, along with lower Treasury collections and shrinking corporate profits, will widen the deficit. Spending will also rise for long-term care for disabled residents and those 75 and older.
The IFO expects that the number of residents under 65 years old will decline 520,000 by 2030, while those 65 and older will grow by 502,000 in the same period.
That will put a strain on state spending. Medical assistance costs will balloon 44% through 2029, while long-term living expenses will increase by nearly two-thirds. Though some of that spending is driven by state funds replacing pandemic aid, aging population care undercuts investments elsewhere.
At the same time, Pennsylvania’s labor force participation rate has trended downward, worsening the state’s revenue outlook. With more older residents relative to younger workers, the tax burden per worker rises. The problem has been called a “silver tsunami” by state officials.
Budget watchdogs were pessimistic after analyzing the IFO’s report.
“The long-term trends look bleak,” Nathan Benefield, senior vice president at the Commonwealth Foundation, said. “The IFO projects Pennsylvania to exhaust its General Fund balance by 2026 —requiring a tax increase, spending cuts, or illegally draining the Rainy Day Fund to pay for ongoing costs as Gov. Shapiro is up for reelection.”
A policy fix, he argued, would be rooted in finding ways to encourage economic growth.
“Lawmakers need to start working now to balance the budget while enacting policies to make Pennsylvania open for business,” Benefield said. “This means controlling the growth of government spending, particularly in Medicaid, while adopting tax reform, reducing regulatory red tape, and increasing educational choice to make Pennsylvania more attractive to job creators and families.”
Though some of the factors driving the budget deficit are the result of policy choices, some broader changes are out of the hands of the governor and General Assembly.
“Demographics are a critical factor that motivate long-term economic, revenue and expenditure trends,” the IFO noted. “Demographic trends determine key populations such as the labor force that affects economic growth, elementary and secondary students who require educational services and older residents who may require long-term care.”
Federal policy makes economic growth more difficult in some cases, too.
“Interest rates are much higher now and many forecasters assume they will remain elevated,” IFO Director Matthew Knittel said. “This reduces the revenue generating capacity of the PA economy because it costs more to purchase cars, purchase homes and carry debt. Businesses also borrow less.”
He said the conditions reduce economic growth, bringing in an estimated 1% less in tax revenues – about $500 million – in the IFO’ long-term forecast.