Inflation and tightening monetary policy on the federal level are expected to cool Colorado’s economy in the coming months, according to quarterly economic and tax revenue forecasts by nonpartisan staff and the governor’s office presented to the legislature’s Joint Budget Committee on Tuesday.
But both forecasts also predicted that Colorado will avoid a recession despite national chatter about the U.S. economy entering a major slump.
“We see about a 1 in 3 chance of there being a recession over the next 18 months based on what we’re looking at in the economy right now,” said Bryce Cook, chief economist in the governor’s Office of State Planning and Budgeting.
The big takeaway: State lawmakers are expected to have more money to fund government services in the coming years as revenue continues to exceed the Taxpayer’s Bill of Rights cap on government growth and spending, which is calculated through population growth and inflation. When the TABOR cap is exceeded, Coloradans get tax breaks and, if the excess is large enough, which it is expected to be for the foreseeable future, refund checks.
“The U.S. and Colorado economies continue to grow, despite new and elevated risks to the economic recovery,” said David Hansen, senior economist with the nonpartisan Colorado Legislative Council.
Hansen said the unemployment rate is expected to average 3.5% in 2022 — which is what the rate was in May — and drop to an average of 3.2% in 2023.
Greg Sobetski, chief economist with the nonpartisan Colorado Legislative Council, acknowledged there are “a lot of recessionary risks” but said vacancies in the job market are one of the reasons he and his staff aren’t forecasting a recession right now. Business could cut a vacant position without necessarily impacting employment numbers, he said.
“There is some space, we believe, for monetary policy to tighten without causing an uptick in the unemployment rate,” he said, referencing the Federal Reserve’s decision to increase interest rates.
The Office of State Planning and Budgeting in Gov. Jared Polis’ office agrees.
“A deep or protracted recession is not currently expected,” OSPB wrote in its presentation to the JBC, which included a prediction that inflation will ease next year.
State Sen. Bob Rankin, a Carbondale Republican who sits on the JBC, thinks both forecasts he heard Tuesday underestimate the probability of a recession.
“I don’t feel good about it,” he said. “We need to look at several different models for different levels of recession because we have to know what they might be.”
Rep. Julie McCluskie, a Dillon Democrat and chair of the JBC, said she is cautiously optimistic.
“If I’ve learned anything through the pandemic and our recovery it’s that it is hard to predict what comes next,” she said. “So I do think we need to be prepared but I am hopeful that we are not going to see a recession. Fingers crossed.”
Polis said in a written statement Tuesday that he is encouraged by the forecasts.
“Colorado’s economy continues to recover faster and stronger and ahead of other states, as new good-paying jobs are added every week and Colorado’s unemployment rate continues to plummet,” the Democrat said.
Colorado Legislative Council said the state’s economy also has fared better than expected in the final months of the 2021-22 fiscal year, which ends June 30. As a result, the nonpartisan office expects Colorado taxpayers will get TABOR refund checks of $750 per individual filer and $1,500 for joint filers starting in late August. (People who file their returns after June 30 will have to wait several months longer to receive their refund checks.)
Democrats, who earlier this year changed the TABOR refund mechanism in an election-year effort to speed up TABOR refunds and try to make them more equitable, initially said the checks would be $400 for individual filers and $800 for joint filers.
Why such a large increase? Economists say the state collected about $1 billion more in tax revenue in excess of the TABOR cap than was forecast during the last quarterly economic forecast in March.
Rankin also said Tuesday that he is concerned that the TABOR cap and inflation are going to collide as lawmakers try to contend with the rising cost of government services. He’s a fan of TABOR, but says it wasn’t mean to operate in an environment where inflation is so high because the TABOR cap is calculated through inflationary rates in past years.
“The theory of TABOR is to let you continue to continue to fund the government that you currently have,” he said. “That’s the intent.”
Rankin wants to examine if there’s a way to use the current inflation rate to calculate the TABOR cap.
“The inflation rate that we use to raise the TABOR cap ought to match our current problem, not a year ago, two years ago,” he said.
The next economic forecast is scheduled for September.