Today, state economists with the Oregon Office of Economic Analysis released their quarterly economic outlook and revenue forecast for June 2020. This forecast is the initial assessment of the overwhelming disruption of the novel coronavirus on the state’s economy and budget, and the outlook of the recovery as lawmakers begin responding to the crisis.
The economists described the outlook as a “sea change” compared to recent forecasts, which predicted a slackening in economic activity but continued growth. Now, the forecast projects Oregon is entering the deepest recession on record since the state began collecting data in 1939. Since the downturn is caused by the suppression of economic activity and not an underlining imbalance in the economy, such as a financial crisis, the duration is expected to be shorter than the Great Recession and return to pre-recession levels by mid-decade. With that said, recessions always have a lasting impact on the economy and the economists believe Oregon will see fewer jobs, lower incomes, and slower population growth in the years ahead.
As compared to a “U” or an “L” shaped recession, the forecast assumes a “square root” recovery where there is a sudden dip in economic activity, a rapid but partial uptick, and then a slower trend back to pre-crisis levels. Nevertheless, there remains significant uncertainty. The forecast assumes the strict social distancing measures will be lifting over the summer and the health crisis wanes by the end of the year. If not, the outlook would become significantly darker and a “W” shaped recession becomes more likely.
Traditionally, sales taxes are generally believed to be more stable during economic downturns because consumption is not nearly as volatile as income. Since Oregon doesn’t have a sales tax and relies predominately on the income tax as its primary funding source, the state typically experiences high revenue volatility during the highs and lows of the business cycle. The opposite may be the case for the current downturn due to the exposure of consumer industries and spending. That is not to suggest Oregon could be immune from the pain this time around. Oregon has shifted its revenue stream to rely more on consumption in recent years by imposing new taxes on lodging, vehicle purchases, gasoline, marijuana, and commercial activity.
The revenue forecast projects a steep and sudden drop in state revenues for the current and proceeding two budget cycles. In February, the economists estimated a $1.1 billion budget surplus. Now, however, they are expecting a revenue loss of $2.7 billion for the remainder of the current budget cycle. The bright spot is Oregon has been building reserves in preparation for the next recession and currently has a high ending balance. The Education Stability Fund and Rainy Day Fund have a combined total of nearly $1.6 billion (8.1 percent of the general fund set aside for reserve), a healthy cushion to help weather the revenue loss. Additionally, the legislature not allocating the ending balance during the 2020 session creates additional breathing room for balancing the budget. Looking ahead, the state should expect biennial revenues to decrease by $4.38 billion in 2021-23 and $3.38 billion in 2023-25, relative to the March 2020 forecast.
The release of the forecast marks an awakening of the legislature, which has been preparing for several months to convene in special session to address the state’s response to the global pandemic. Yesterday, during a roundtable discussion hosted by the Portland Business Alliance, House Speaker Tina Kotek (D-Portland) said the legislature could not postpone budget adjustments until the 2021 regular session and would need to convene in a special session in the summer months. The Speaker said the Ways & Means Committee would begin crafting a plan to recalibrate the budget and suggested a strategy of relying on the state’s reserves and high ending balance, administrative efficiencies, and targeted programmatic cuts to weather the immediate budget crisis.