Economists: Alaska risks recession

Posted: Tuesday, January 29, 2002

ANCHORAGE (AP) -- Economists say Alaska is facing a recession, even if proposed solutions to the state's chronic budget problems are put in place.

Budget forecasters predict state government will be short about $1.2 billion annually in the coming years, due to falling oil production. That shortage is almost one-third of what's needed to cover state services.

Proposed solutions include cutting state government, income taxes, sales tax and earnings from the $25 billion Permanent Fund. But whatever the fix, there will be less money in the Alaska economy.

''None of these options can prevent a hit on the economy. The question is how you do it,'' David Reaume, a former Alaska economist now based in Washington, told the Anchorage Daily News.

Less money could result in fewer jobs and slower economic growth, economists say.

''We are going to take a hit. There's just going to be less money around,'' said Scott Goldsmith, an economist at the University of Alaska Anchorage.

The state has had budget shortfalls in eight of the past 10 years. But the threat will grow if the problem is not addressed quickly, according to economists such as Goldsmith, Reaume and George Rogers, a former state economist in Juneau.

''We're looking at a slowdown if not an outright recession,'' Goldsmith said. ''The longer we wait the fewer options we have. And the more pain we will inflict on ourselves all at once.''

To raise $400 million annually in new revenues, Gov. Tony Knowles has proposed a personal income tax, an alcohol tax increase and a cruise ship head tax. Knowles, who is in his last year in office, wants future governors to phase in the remaining $800 million.

Alaska's revenues are tied to oil. Last year, the state got more than 80 percent of its general fund revenue from the oil production and taxes on production companies. Oil flow, however, is half the 1988 peak of 2 million barrels a day.

To compensate for the difference between revenue and spending, the Legislature has regularly drawn from the multibillion dollar Constitutional Budget Reserve. But that account is shrinking. Waiting until reserves dry up would force immediate, sharp taxes or other measures that could throw the economy into recession, Gold-smith said.

Filling the gap means either cutting government or diverting money through taxes or a cap on the Permanent Fund dividend. Many believe the likely fix will be a mix of all options.

But the mix and timing are critical, economists say.

Since 1990, Alaska's economy has added jobs at an average of 1.8 percent, or 4,500 jobs per year, said state labor economist Neil Fried.

Diverting $1 billion from people's pockets into state spending could cost 10,000 jobs, Goldsmith said. Taking that much in taxes in one swoop could mean abrupt, negative job growth. That could lead to a shrinking population and a drop in property values.

No one envisions such a drastic approach yet.

Goldsmith said he backs an income tax because it can be deducted from federal taxes and places the biggest burden on the highest earners. After that, he said, the state should use Permanent Fund earnings.

The worst course would be a steep cut in state spending, say Reaume and Goldsmith.

''If you seriously wound state government, you will seriously wound yourself,'' he said.



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