(The Center Square) – Going into 2023, Utah’s budget includes roughly 29% of the state’s revenue from federal funding.
But with national inflation and federal debt on the rise, what if those revenue streams from Capitol Hill set out for the Beehive State start drying up?
Utah’s Legislative Fiscal Analyst Jonathan Ball posed such a question to the state’s Federalism Commission during their meeting Tuesday while advising the group to look at several options for contingency planning for the state budget in the event the state should ever see any potential losses in federal dollars received.
“The largest part of our revenue stream is federal funds, it’s been that way for a few years now,” Ball told the committee about Utah’s current budget.
Ball explained to the committee that the acceleration of inflation nationally, and in turn felt by the state, comes from a combination of the expansion of the U.S. money supply as well as an increase in the federal deficit caused by federal borrowing practices used to support states like Utah during the pandemic.
Federal borrowing, Ball said, has led to higher interest rates against that borrowing, which may lead to the federal government tightening the reins on federal discretionary spending the states use to support programs if those funds are needed to pay for federal debt services.
“It’s now close to a third of all discretionary spending in the federal budget goes to pay for debt service,” said Ball.
Ball also said the risk of another country sharing the market as a currency reserve could potentially devalue the dollar and raise federal borrowing costs, which could also ultimately affect federal funds for states.
“The U.S. Dollar is the best safe harbor,” said Ball. “Okay for now, but eventually, another world country, another world power, is going to establish their currency as a world reserve and that becomes an alternative to the dollar for investors. And therefore, investors will not be willing to lend to us at the same price anymore, it’s called the substitution effect.”
With these factors pointing to the potential reduction in federal funds available to states for budgeting, Ball said it was time the state looked at increasing measures to increasingly manage the state’s budget out of its own pocketbook.
Ball suggested the state should look at expanding on its current state laws and policies that require agencies to draft contingency plans should federal funds decline five or 25 percent. Instead of having the agency complete the contingency plan, Ball suggested that the committee look at prioritizing what programs were most important to the state.
“Well, de facto, you’ve already done this,” Ball told the committee. “You’ve already said Medicaid is our most important federal program, we’re going to set aside our own money to prop up Medicaid. That was a policy choice. So you would sort of take that to the next step…and say, what’s the next most important federal program. Is food stamps? Is it the federal highway program?”