The government of New Jersey has resorted to fiscal evasion—avoiding the rules meant to constrain spending and has sustained spending growth through fiscal illusion, obscuring the full costs of policies by relying on intergovernmental aid and debt to achieve the current level of spending. The state has long emphasized current spending at the expense of higher taxes for future taxpayers. The costs of this approach are now coming due.
2. The State of the State
New Jersey state level debt more than doubled in real terms from 4.4 percent of GDP to 9.48 percent of GDP in 2008.
Debt jumped between 2003–2006, due to the $3.3 billion tobacco settlement securitization in 2003 and a $7.3 billion debt issuance in 2006. In 2008, debt totaled $5,187 per resident, or $20,748 for a family of four.
3. Loss of the Old-Time Fiscal Religion
The last 40 years of Keynesian economics demonstrate that high levels of public debt and spending create inflation and low growth. In the present era, governments realize that if they present policy proposals with a price tag attached to them, they will find few takers, but if they do not reveal the full bill, voters are more likely to accept such policies. This is the core of fiscal illusion.
4. Rules That Do Not Bind
New Jersey’s budget—like all state budgets—is developed under constitutional and legislative rules. Rules meant to constrain spending growth in New Jersey, such as the state budget spending cap, are weakly designed and contain many exceptions. Strict constitutional rules on the issuance of debt have been relaxed through judicial interpretation, highlighting the problem associated with enforcement.
5. Fiscal Evasion
New Jersey’s budgetary rules have proven ineffectual in limiting the growth of public spending and debt. Legislative spending caps are weak and only apply to a fraction of spending, allowing the state to continue unsustainable fiscal practices. In addition, the state Supreme Court has allowed the state to evade constitutional limits on the issuance of debt.
6. Fiscal Illusion
Federal aid to the states, state aid to municipal government, and reliance on debt, have clouded the full costs of spending to New Jersey’s citizens. Fiscal illusion occurs when voters do not know how much revenue local government obtains from higher government grants. This causes voters to perceive the cost of local services as less than they actually are, leading voters to supporting greater local spending they might otherwise.
7. Branching Out: When Courts Set Policy
The New Jersey Supreme Court has taken an active role in designing state and local policies. In particular, the court’s rulings on school funding, the Abbott
decisions, and the subsequent legislative implementation of these decisions have profoundly altered New Jersey’s tax regime and budget practices, leading to a dramatic increases in income and property taxes.
8. Policy Recommendations
New Jersey must reform its fiscal institutions—the rules under which elected officials budget. Re-establishing fiscal prudence requires a) constitutional rules that constrain state and local government spending and b) policies that promote the best use of public money. Other states have been successful in constraining spending and as a consequence may be more resilient during periods of crisis.
Consistent and binding institutional reforms that encourage fiscal prudence will not only address the many (and interlocking) causes of New Jersey’s fiscal crisis and decline, but it will also send a powerful signal to citizens, businesses, and outside investors that New Jersey is committed over the long-run to returning to the guiding fiscal and economic principles which made it an economic leader.
Case Study: Has Abbott Worked?
While it is difficult to compare academic achievement across time periods, evidence indicates that Abbott money has had little effect on improving student performance. The current method for assessing student performance is the High School Proficiency Assessment, instituted in 2003. Students have not been tested consistently before this time, making it difficult to measure the impact of Abbott on student performance.
Appendix: Features of New Jersey’s Government and Budget