Hoosier Economy Budget Brief: Revenue Forecast

Budget Brief: Revenue Forecast


Indiana Revenue Forecast
April 15, 2011
State Budget Committee
Presentation by Jim Diffley, Chief Regional Economist IHS Global Insight



  • IN was among the growth leaders in early 2010, that has slipped away and we are more in the middle now. Recovery will be slow, but it is in motion.
  • Indiana expected to have employment growth of 1.6-1.8%
  • Estimate that IN will recover lost jobs by early 2014.
  • Wage gains will be nominal.
  • New car registrations will see small increase.
  • Housing market will jump enormously. (Mostly because it was so slow past three years.)


  • Increased FY 11 forecast from Dec. by $118.9M, 7.2% increase over Fy 10.
  • Increase FY 12 by $339.6M or 5.1% over FY 11.
  • Increase FY 13 by $303.9M or 3.7% growth over FY 12.

Main considerations that committee used to guide the forecast:

  • Sales and income taxes have stabilized and are growing.
  • The revenue models the committee uses are performing satisfactorily, except for the gaming model.
  • Riverboat wagering tax revenue is lagging behind their original forecast.

Sales and Income Taxes:

  • Sales and income taxes account for 83% of IN revenue growth in the Revenue Forecast.
  • Indiana’s collections in these two areas have outpaced their targets every month for the past five months.  (Five months of consistent, good performance it is indicative of a trend).
  • Monthly sales tax revenue is historically, relatively stable. Year-to-date, Indiana has collected $23M more than was forecasted for monthly sales tax collections. This represents about a 5% increase year-to-date.
  • Income tax collections vary widely month to month and thus those trends are less determinative.  Actual year-to-date income tax withholdings through March 31 exceeded last year’s withholdings during the same period by 6.2%, but it cannot be relied on as fully for dictating how the revenue trends will continue.

Riverboat wagering tax:

  • Riverboat revenue is lagging. Indiana may be approaching a market saturation problem in the gaming industry.

o   Short run issues that have affected riverboat revenue: weather and gas prices.
o   Long run issues: possible market saturation and competition issues.

Racino revenue has seen growth:

  • Growth may be due to displacement of riverboat business (they estimate that 40-45% of racino revenue may actually be displaced riverboat revenues).
  • They are also estimating even larger revenue losses in the future due to the casino currently being constructed in Toledo, OH.  We will see full impact of this competition in 2013.

Potential Threats:

  • Gas prices
  • Large federal budget deficits
  • Disruptions in the supply chain that create shortages (Japan)
  • Uncertainty in the housing market
  • Three wars
  • High unemployment


  • Projected budgetary needs for Medicaid in FY 12 and 13.
  • Although they plan to institute budget reduction initiatives totaling $100 and $112M in FY 12 and 13 respectively, they still project substantial increases in the total Medicaid budget.
  • Medicaid budget (that subtracts the estimated cost saving measures) is $1,716M and $1,882M for FY 12 and 13.
  • FY 11 state appropriations were $1,429M and $1,429M in FY 10 and 11.
  • FY 12 and 13 will see a budget increase of $287M in FY 12 and $453M in FY 13.

Medicaid Cost Components:

  • The majority of the cost increases are estimated to be incurred due to an increased disabled population utilizing Medicaid services.
  • Eligibility- no reductions to eligibility allowed through 2013 due to ACA.
  • Benefits: mandatory benefits must be provided to receive federal funds. Changes to any current optional benefits not required under ACA will cause legislative action.
  • Projected enrollment growth for disabled population- from 650,000 to 750,000 by end of 2013. But then enrollment growth rate will decrease.


Risks that may affect Global Economy-

  • While Japan’s economy is recovering, global supply chains may face disruptions. (Most disruptions will be short term).
  • Turbulence in Middle East presents risks to oil supplied and prices.
  • Europe faces an extended period of weak growth as sovereign debt problems are resolved.
  • Emerging markets continue to offer the best growth prospects.

Unemployment Rates:

  • Predict that unemployment rates will decline slowly.
  • Nationally, unemployment will be around 7% in 2014.
  • The “full employment rate” is widely agreed to be around 5%.
  • Consumers spent less on oil consumption than predicted in the last quarter. Oil prices have offset the stimulus that the president’s tax cuts would have created.

Economic growth predictions by sector:

  • Residential investment estimated to go up by 25.9% in 2012 (mostly because recent declines have been so dramatic).
  • Federal, State, and Local governments are the only sectors estimated to decline in 2012.

Interest Rates:

  • Interest rates are expected to increase in 2012.

What’s effecting consumer prices?

  • Positive forces- Upturn in employment, real income growth, stock market recovery, and low interest rates.
  • Negative Forces: Rising gasoline prices, high unemployment, reduced housing wealth, and high debt burdens.
  • Consumers are still cautious.

Risks to the US Forecast:

  • Downside risks:

o   Oil prices may continue to soar.
o   Financial instability could return if the housing recession drags on.
o   Consumers could retrench after setbacks to asset values and purchasing powers.
o   Businesses could remain reluctant to invest.

  • Upside Risks:

o   Credit channels function smoothly, supporting investment.
o   Rapid technology advances could lead to real income growth.
o   Robust growth in emerging markets could speed growth.

Bottom Line:

  • Believe recovery is self sustaining now (barring a major oil market disruption).
  • Believe business equipment investment, exports, consumer durables, and housing construction will drive the expansion.
  • The federal government needs an “exit strategy” from deficit spending or financial markets will eventually impose one.