The onset of the COVID-19 pandemic triggered an avalanche of federal government spending shoveled out to states and municipalities in anticipation of pandemic-related revenue shortfalls that never actually materialized.
This resulted in a financial windfall to state and local governments which have gone on a spending spree plumping up budgets for everything from schools to asphalt and papering over structural budget deficits. The massive federal spending – financed by essentially “printing” money – also triggered runaway inflation and ballooned the federal budget deficit.
Fast forward to 2025 and the COVID-19 funding stream has run dry. The impact on state, county, local and school district budgets is now being felt. From Allegheny County to Dauphin County to Delaware County taxpayers are being hit with massive tax hikes. Significant local and school district tax increases are soon to follow.
At the state level there has been a tug-of-war between Governor Josh Shapiro and allied House Democrats who spent with abandon and fiscally responsible Senate Republicans who pushed for surplus funds to be added to the state’s Rainy Day fund. The result was somewhat of a compromise, but overall spending increased at an unsustainable rate.
The exponential increase in state spending and the end of the COVID-19 gravy train has created a fiscal cliff in Penn’s Woods – and state government is running full speed toward the precipice.
We are mid-way through the fiscal year and preparation of the next state budget will soon begin. The Independent Fiscal Office (IFO), which tracks state spending and makes factual revenue forecasts, is warning that massive deficits lie ahead if state spending continues at current levels.
“The general fund, based on our forecast, is depleted next fiscal year and our rainy day fund ending balance is largely depleted by (Fiscal Year 2026-2027,” warns IFO Director Matt Knittel. The state’s budget deficit is projected to balloon from $3.4 billion this year to $6.7 billion by Fiscal Year 2029.
It is noted that this is an increase of $2.2 billion over last year’s budget deficit projections. The IFO report concludes: $1.9 billion of that increase is directly related to spending policies advocated by Governor Josh Shapiro. The report further noted average spending growth “significantly exceeds” the average revenue growth by 1.2 percent.
Translated from fiscal speak into English this means we are spending well beyond our means. Either this year or next the governor and the legislature will be forced to cut spending, increase taxes, or enact some combination of spending cuts and tax hikes.
This is not the first time state government has been forced to detox from short-term federal funding. During the administration of Governor Ed Rendell one-time federal funding designed to help states mitigate the impact of the “Great Recession” was added to the state’s budget for public education. The funding ran out during the administration of his successor, Governor Tom Corbett, who was then blamed by the Left for “cutting” education spending when in fact the reason for the decrease was the end of the federal funding stream.
This time, however, Governor Shapiro will have to deal with the fiscal impact of his profligate spending. And the timing for him could not be worse. Shapiro must run for re-election in 2026 meaning the gubernatorial election cycle is now about to get underway.
Given the IFO’s projections budget makers will be forced to deal with the structural budget deficit either this year or next – all before Pennsylvania voters go to the polls in November of 2026 to elect a governor. It would be prudent for lawmakers to take steps to mitigate the looming fiscal cliff in crafting the Fiscal Year 2025-26 state budget. But, with the state House remaining in control of the far-Left faction of the Democrat Party fiscal restraint – or even admitting there is a problem – is not something we can expect.
Rather than putting the brakes on spending look for Governor Shapiro and legislative Democrats to keep their feet on the accelerator putting us on course for a crash landing sometime in the not too distant future.
(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly American Radio Journal and Lincoln Radio Journal. His e-mail address is [email protected].)
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