Economy headed for a cooldown, experts say. Can Mass. afford to fix housing, child care?

  • Oops!
    Something went wrong.
    Please try again later.

The "unexpectedly high" rate of economic growth in Massachusetts since mid-2022 is expected to start cooling substantially, and some economists likely to testify at next week's annual revenue hearing think that now is the time for Beacon Hill to address the state's longstanding transportation, child care and housing issues as a way to better position the state for future growth.

But the board of economists at MassBenchmarks, which is published by the University of Massachusetts Amherst Donahue Institute in cooperation with the Federal Reserve Bank of Boston, said Wednesday that it is concerned the state might not have sufficient revenue to cover the costs associated with delivering on new tax relief directives and raising spending on those three areas.

"[T]he Massachusetts economy has undergone a period of substantial growth in recent years, including both a recovery and an economic expansion following the pandemic. Economic growth in the state, along with the national economy, likely peaked during the third quarter of 2023 and slower growth is expected heading into 2024," the MassBenchmarks board wrote in its latest update Wednesday. "In this environment, Massachusetts will need to continue to coordinate policies that address high costs and inequality to encourage the growth of its labor force and set the stage for future economic growth."

The group added, "This is likely to include a more active role for the state to support beneficial programs, including childcare, that are seeing reduced funding due to a wind down of federal stimulus spending."

The Massachusetts Statehouse on June 19, 2023.
The Massachusetts Statehouse on June 19, 2023.

Slowdown prediction comes as state sets next budget

The state's role in helping to fund important services like child care will likely be on the minds of the Ways and Means Committee co-chairs and Administration and Finance Secretary Matthew Gorzkowicz on Monday, when efforts to start constructing the fiscal year 2025 budget get underway in earnest with an annual hearing designed to help state budget officials reach a consensus revenue projection.

The annual hearing typically features a regular cast of economists who try their best to enlighten state budget managers as to what might be in store for fiscal 2025, which will run from July 1, 2024 through June 30, 2025.

Two MassBenchmarks board members -- Michael Goodman, the former head of the UMass Dartmouth Public Policy Center who is now senior advisor to the chancellor on economic development initiatives, and Alan Clayton-Matthews, an associate professor emeritus of economics and public policy at Northeastern University -- are regularly called upon to testify at the annual consensus revenue hearing.

If they are called to testify this year, Goodman and Clayton-Matthews could tell lawmakers that the MassBenchmarks board's expectation is that economic growth will "slow substantially" in the fourth quarter of 2023, which is already nearly over, and into the first three months of 2024. Earlier in November, MassBenchmarks predicted a 1.9 percent annualized rate of growth in the fourth quarter and a 0.3 percent growth rate in the first quarter of next year.

The "cautious optimism that the state’s economy will continue to expand" is tempered, the board said, by "looming risks," like the ominous sign of two successive months of employment declines, persistently high interest rates, hesitancy by businesses to invest, stock market volatility, a Congress that repeatedly delays passage of a national budget, and the geopolitics associated with ongoing conflicts in Ukraine and the Middle East.

Much can be done to address high costs of housing and child care, experts say

But despite those uncertainties, the board said "there is much that can be done at the state level, now and in the longer-term," to address the high costs of housing and child care in Massachusetts and the state's unreliable public transit system, all of which have contributed to a net outflow of residents to other states since the pandemic began in 2020.

The recently-expanded Child and Family Tax Credit and other policies like increasing the rental deduction will help counter the state's high costs of living, the board said, but the big question is going to be whether the state has enough money to do more.

"The Board is concerned, however, if the state will have sufficient revenue to cover tax cuts (noting that cuts are concurrent with the revenue-generating 'Millionaire’s Tax' implemented in 2023) while raising overall spending on childcare, housing, and transportation — critical pillars for Massachusetts to undergird present and future competitiveness," the board wrote Wednesday. "In the face of federal budget cuts, it is becoming more of an imperative for the state to step in and support the areas that are fundamental to sustaining its people and growing the economy."

Gov. Maura Healey led this year's push for the roughly $1 billion tax relief package, framing it as essential to helping the state compete. Its passage followed nearly $3 billion in automatic tax rebates in 2022 because state revenues had run so hot that they cleared a trigger in a 1986 voter law.

Business groups call for spending restraint

Under Republican Gov. Charlie Baker and now under Healey, the Democrat-controlled Legislature have both bulked up the state's savings account to about $8 billion and run up spending in recent years, prompting a call this month from business groups for more restraint.

Total spending out of the state's General Fund increased by 26.7 percent between fiscal 2018 and fiscal 2022, a time when the Boston area consumer price index grew at 14.7 percent, the leaders of several chambers of commerce said in a letter to legislators. A total of $39.9 billion in expenditures in fiscal year 2018 grew to $50.6 billion by fiscal 2022, according to data from the Greater Boston Chamber.

"The drastic increase in government spending over the past five years is a growing concern for our future competitiveness and may detrimentally impact the long-term fiscal health of Massachusetts," the heads of nine business groups said in their letter to Gov. Maura Healey and legislative leaders.

The board's revenue concerns are not out of the blue. Through the first four months of fiscal 2024, tax revenues are $355 million behind where the Healey administration and lawmakers expected them be. Gorzkowicz said this month that "no one's panicking at this point," but Senate Ways and Means Chair Michael Rodrigues said recent revenue figures make him "very concerned" and his House counterpart Aaron Michlewitz has said the House "will need to be ever vigilant in guarding the fiscal wellbeing of the commonwealth going forward."

November revenue collections must be reported by the Department of Revenue by Dec. 5 -- the day after the fiscal 2025 consensus revenue hearing -- and the monthly benchmark is set at $2.527 billion.

This article originally appeared on Cape Cod Times: Child care, housing, public transit issues eyed as Mass. economy cools