The Long-Term Fiscal Gap

The fiscal gap threatens future public services. The fiscal gap -often called “a structural deficit” by budget watchers–means that normal revenue growth is not enough to finance the normal growth of expenditures over the long term. A structural deficit means that, in normal or average economic times, our governments cannot maintain all the services that Oklahomans rely on.

The recurring and growing shortfalls that the Oklahoma Legislature has faced in recent years – even in years when the state’s economy has been performing well – reflect the state’s structural deficit.  Since the late 2000s, every year has seen the use of large amounts of one-time revenues to bring the budget into balance. Most years have seen funding cuts to most state agencies and not enough funding to cover growth in caseloads or enrollment, pay for annual inflationary costs in operating expenses, or provide pay raises for teachers and state employees and cost-of-living adjustments for retirees.

According to economics professor Kent Olson, Oklahoma already faced a small structural budget deficit in 2021, before the economic downturn resulting from COVID-19. His projections are for the structural deficit to continue to rise in the coming decade, reaching over $1.0 billion by 2030. The deficit occurs because expenditures must grow 4.4 percent every year just to keep up with inflation and with population changes, while revenues will grow only 3.3 percent per year under current policies. The gap between what we need and what our current revenue system produces thus grows 1.1 percent every year.

However, Oklahoma has been able to take steps to close the fiscal gap in the past. Dr. Olson’s work indicates that, had it not been for tax increases enacted in 2016-2018, the 2030 deficit would be more than double, $2.3 billion. The chart below shows how the gap is projected to grow and how much larger it would have been without tax increases.

These projections assume a level of economic growth that now seems unlikely. Current conditions are likely to expand the fiscal gap beyond Dr. Olson’s estimates by both reducing revenues and increasing the cost of services.

Structural deficits are among the hardest public policy problems our leaders face, for several reasons:

• The full effects are in the future and do not need to be addressed immediately;
• Much of the growth in expenditures is outside the control of the government;
• Controlling the expenditures would require reducing benefits to politically powerful and economically important groups; and
• There is little public support and even less public leadership for reevaluating and restructuring our tax system, which may be necessary to solve the fiscal gap.

However, Dr. Olson’s work indicates that Oklahoma has been able to take steps to close the fiscal gap in the past. Oklahoma governments are not alone in facing structural deficits. The federal and most state governments are in similar circumstances. The Government Accountability Office (GAO) predicts that structural deficits will damage our economy and our standard of living and ultimately could compromise national security. They suggest that government leaders and the public must better understand reasons behind the structural deficits and what we can do about them.

‹‹ Go back to Policy Challenges We Face | Go on to Causes of the Fiscal Gap ››