Short-Run Economic Impacts of Alaska Fiscal Options

Abstract

Today Alaskans are talking about how to close the huge budget deficit the state government is facing, with the oil revenues it has depended on for decades now a small fraction of what they once were. Alaska has had budget deficits for several years, and it has made budget cuts—but it has mainly relied on billions of dollars in savings from the Constitutional Budget Reserve and other funds to cover the deficit. Those savings are dwindling, and the state needs to take measures to close the deficit. An important consideration is how various ways of reducing the deficit might affect Alaska’s economy. This study compares potential short-run economic effects of 11 options the state might take in the next few years to reduce the deficit and that are sustainable over the long term. We looked at economic effects of several types of spending cuts and taxes, as well as reducing the Permanent Fund dividend— the annual cash payment the state makes to all residents—and saving less of Permanent Fund earnings. We’re not advocating or opposing any option: our purpose is to estimate and compare the magnitude of the short-run economic effects of different ways of reducing the deficit. Broadly speaking: • Different ways of collecting money from Alaskans affect those with lower and higher incomes in significantly different ways. • Anything the state does to reduce the deficit will cost the economy jobs and money. But spending some of the Permanent Fund earnings the state currently saves would not have short-run economic effects. Saving less would, however, slow Permanent Fund growth and reduce future earnings. • Because the deficit is so big, the overall economic effects of closing the deficit will also be big.