Virginia's Fiscal Health: A Beacon of Stability Amid Macro Uncertainty
Virginia continues to stand as a paragon of fiscal prudence and economic resilience, particularly when compared to many other states in the union. This fiscal stability acts as a buffer, allowing the state to navigate economic uncertainties more adeptly than its peers. During a recent meeting with the governor of Virginia, the Commonwealth’s secretary of state, and other notable officials, my colleagues on the Joint Advisory Board of Economists (JABE) and I explored the current fiscal status of the state, while considering potential risks on the horizon. Below is a (very) short summary.
The Current Fiscal Condition
Employment Growth and Labor Market
Virginia has shown impressive employment growth, especially over the last two years, with labor market participation rates consistently exceeding national averages. This high level of participation indicates a robust and dynamic labor market, which in turn contributes to the state's overall fiscal strength.
Business Investment
Virginia has not only attracted but also sustained a high level of business investment. This is a testament to its business-friendly policies, top-notch infrastructure, and skilled workforce, making it a magnet for both startups and established corporations.
Tax Revenues
Healthy tax revenues in Virginia are the result of a diversified economy that includes technology sectors, healthcare, and traditional industries like agriculture. This diversified base provides a huge financial cushion, reducing vulnerability to sector-specific downturns.
Fiscal Prudence
Virginia's commitment to fiscal prudence is not new, though amplified in recent years under a new administration. The state has historically maintained balanced budgets and engaged in responsible debt management. This conservative fiscal approach sets the stage for its current and future fiscal strength.
Risks to Consider
Geopolitical Risks
International tensions and geopolitical uncertainties could have a significant impact on Virginia's trade and investment landscape. While the state's economy is strong, it is not immune to global influences. For example, soy bean producers export more than $1 billion of soy to China. As China’s economy wanes, so will the economic condition of the Commonwealth.
Federal Reserve Policies
Changes in Federal Reserve policies can affect Virginia just like any other state. Shifts in interest rates or other monetary policies could impact the state’s debt servicing costs and investment returns. If the Fed further decides to hike again - though currently unexpected - the macroeconomic headwinds will be hard for even the economically stable state of Virginia to overcome.
Conclusion
In summary, Virginia's fiscal condition is robust, particularly when compared to many other states. However, maintaining a sense of fiscal prudence is crucial, especially in the face of geopolitical risks and potential shifts in Federal Reserve policies. The state's diversified economic base and history of fiscal responsibility provide it with the tools to weather macroeconomic headwinds better than most.
Some useful sources:
Joint Legislative Audit and Review Commission (JLARC) issued its annual report
Secretary of Finance Stephen Cummings reported on the revenue results from July through September, the first quarter of Fiscal Year 2024