Regulatory policy

How will federal economic policy affect Connecticut? – Milford-Orange Times

By Kevin Mcnabola
Orange Finance Council

Kevin McNabola

Moody’s Investor Services recently reported that government debt, pensions and other post-employment benefit liabilities have all increased over the past year in Illinois, Connecticut, New Jersey and Kentucky. However, there is good news to report on rising revenues in New Jersey and Connecticut, which now has a fiscal reserve of over $3.1 billion. Connecticut has taken the right steps to manage its long-term financial obligations and prepare for the approaching economic storm which is sure to be challenging given the Federal Reserve’s current economic policies.

Connecticut’s fiscal reserve is attributed to a strong stock market and rising state and corporate tax revenues, which contributed to Connecticut’s first credit rating improvement in more than two decades. The credit rating for general bonds has been upgraded from A1 to Aa3. Due to the cap and size of our fiscal reserve, the state was able to repay $1.6 billion of its long-term unfunded pension liabilities to help put the state on a more sustainable path.

However, it should be mentioned that the economic policies of the Federal Reserve and Treasury over the past 18 months have jeopardized Connecticut’s recent successes and financial viability.

Based on the economic headwinds Connecticut is currently facing with rising interest rates, inflation, and wage pressures, the Fed should have taken action to follow the economic policies of President John F. Kennedy, the first president of the offer. Kennedy implemented sweeping tax rate cuts across the board in 1962, resulting in gross domestic product growth of 6.1% in the first year and an average of 4.9% for the rest of the 1960s.

President Ronald Reagan implemented similar policies in 1982, which included the free market principles of limited government, deregulation, lower taxes, and a strong dollar. Reagan’s actions in 1982 led to tax cuts and long-term economic growth (4.4% growth from 1983 to 1990 and continued growth into the 1990s).

Current Fed policies have taken a strong economy with no inflation and turned it into strong inflation in just over a year. Federal fossil fuel policies have caused the prices of gasoline, oil, natural gas and coal to skyrocket, not to mention food prices. Over the past year, Americans have seen a tax hike and the biggest regulatory attack on business we’ve ever seen, with real wages for workers steadily falling. Trillions of dollars in federal spending hit an economy that was already recovering strongly from the pandemic with a tight labor market. The Federal Reserve has kept the money taps open for too long, in part to fund the borrowing needed for all spending. Based on the actions of the Fed, one can easily say that the current US inflation rate of 8.3% was predictable.

Connecticut’s financial health is stronger than it has been in decades. However, the Fed’s policies will cause stock market returns and government revenues to fall, as well as business tax receipts to plummet over the next year. These will ultimately lead to deficits and the inability to target additional financing to repay long-term debt.

Connecticut still ranks in the top five states for long-term liabilities, due to decades of fiscal mismanagement and rich defined-benefit pension plans for state employees. However, Governor Ned Lamont has done much to change that by working to put Connecticut on the path to fiscal sustainability. He tackled a $3.7 billion deficit he inherited and invested in paying down pension obligations with a budget surplus.

The cost of servicing retirement debt will continue to weigh on states like Illinois, Connecticut and New Jersey for the foreseeable future. However, Connecticut has begun the process of redeeming its bonds and is in a better position than most states. The fact remains that Connecticut’s greatest economic challenge in the near future will be competing with bad Fed policies that didn’t work in the 1970s and won’t work today.

Kevin McNabola is the City of Meriden’s Chief Financial Officer and a member of the Orange Finance Council.