With recession fears subsiding, new state economic forecast expects ‘firm but steady growth’

SPRINGFIELD – The state’s two main fiscal forecasting agencies agree: Illinois’ finances will see a strong close in the final 3 ½ months of the fiscal year before things tighten a bit next year.

It’s a picture laid out in Gov. JB Pritzker’s budget proposal last month, and it got a vote of confidence Tuesday from the legislature’s fiscal forecasting body, the Commission on Government Forecasting and Accountability.

“So looking into [fiscal 2025], what are we seeing? There is some concern going forward that the economy, or not necessarily the economy, but the revenues are slowing down,” COGFA revenue manager Eric Noggle said at the annual revenue briefing to the bipartisan commission of lawmakers.

Still, COGFA staff noted general nationwide fears of a recession have subsided, and the scope of the potential slowdown is reflected in Pritzker’s proposed spending plan for the upcoming fiscal year.

“During our last annual revenue meeting, we mentioned that many of the economic firms were still forecasting such a chance of a recession,” COGFA executive director Clayton Klenke said. “But we mentioned that the data that we saw coming in month to month gave us greater confidence that the economy would continue to chug along. And that is what we have continued to see.”

COGFA’s revised revenue estimates expect the current fiscal year to end with $52.6 billion in revenue, or about $2 billion ahead of what lawmakers budgeted for last May.

That estimate tracks closely with the revenue estimate released by the Governor’s Office of Management and Budget in February. The GOMB estimate was about 0.7%, or $374 million, below COGFA’s updated projection.

Current-year revenue estimates have been driven upward by strong economic performance, as seen by an annual transfer from the state’s income tax refund fund that exceeded expectations by $255 million. Larger than expected transfers from that fund are a general indicator that individual household incomes are performing strongly, driven by such factors as strong stock market or interest gains in the previous fiscal year.

But state coffers also saw about $881 million in unexpected one-time revenues this year, according to COGFA. That includes $633 million received from the federal government as reimbursement for Medicaid services the state failed to collect in previous fiscal years.

Because those one-time sources are not expected to repeat, COGFA is expecting revenues to decrease to about $52.1 billion in the fiscal year that begins July 1.

That’s $916 million below GOMB’s estimate that was included in Pritzker’s budget proposal. But Pritzker’s plan also anticipates raising more than $1 billion in additional revenue through tax law changes, including more than doubling the state tax on sports betting and extending a cap on a tax credit for net operating losses that businesses can claim.

Factoring in those changes, COGFA’s estimate would be about $182 million above what the governor’s office projected in February – a difference of just 0.3%.

Benjamin Varner, COGFA’s chief economist, said the state’s economic projections are largely based on data from the financial analytics group S&P Global.

S&P projected a 55% likelihood that the economy will progress “with firm but slowing growth.” It projected a 30% likelihood of a “pessimistic” scenario which would entail “a short, two-quarter recession.” A more optimistic scenario, marked by “stronger consumer demand and more banking support,” was given a 15% likelihood.

Noggle noted sales tax revenues are a main area of concern, driven by a slowdown in “big item purchases.” He said that was a result of the federal reserve keeping interest rates high, which discourages borrowing.

Growth in sales tax has also slowed as federal stimulus funds have waned, he said, and consumers are slowly moving back toward pre-pandemic trends of spending more money on untaxed services than on taxable goods. Wages and employment are still growing in Illinois, but at a slower pace than one year ago.

State Sen. Elgie Sims, D-Chicago, noted Illinois’ recent string of revenue overperformance is at least partially attributable to the fact that lawmakers have adopted conservative revenue estimates.

“In these times of uncertainty, if things go bad, it could go really bad,” Noggle responded. “And I think it’s our responsibility to not provide a number that is too optimistic or too pessimistic.”

Caution, Noggle noted earlier in the meeting, is one reason COGFA did not update its personal income tax estimates for the current fiscal year. April and May have generally been volatile and difficult to predict as far as state revenues go, he noted.

But Noggle said his “gut” tells him an upward revision in that category could still be on the horizon.

“Just personally doing my own taxes and talking to my father-in-law and my dad, that all three of us have had to pay more taxes than we expected,” he said. “But the good news is, that’s because the higher interest income that we’ve gained from our savings accounts and our CDs and stuff like that. So if that is the same case throughout the state, which it probably will be, I think revenues will turn out to be pretty good from final tax payments in this fiscal year.”

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