5. The Fiscal Gap
What is it?
The Fiscal Gap is the result
of state general fund recurring revenue not being large enough to pay
for ongoing state general fund spending.
depends primarily on revenues from its oil resources (including royalties,
severance, income and property taxes) to fund state government.
production at Prudhoe Bay, the biggest oil field in Alaska, has been declining
Alaska state general fund spending
declined during the 1990s (see graph below) as have revenues into the
Alaska general fund. State revenues fluctuate depending on the price of
oil; however, revenue from oil is trending downward because of a decline
in oil production and the average tax rate as older fields become depleted.
In some years (such as 2000 and 2001) Alaska has been "rescued"
by higher oil prices—the fiscal gap just about disappeared. However,
in other years low oil prices exacerbate the decline in oil production.
In eight of the last 12 years, revenues have been less than expenditures.
In those years Alaska
has used funds from the Constitutional Budget Reserve (CBR)—its
"rainy day" fund—along with budget cuts to help cover
state budget deficits. Through June 2002 the state had "borrowed"
about $4.8 billion from the CBR to cover deficits in the state general
fund during the last 12 years. At the current rate of withdrawal, the
CBR will be empty in 2004 or 2005.
of Revenue, Fall 2001 Revenue Source Book; Legislative Finance.
To close the fiscal gap, Alaska
needs a plan that will provide a balanced budget in the face of fluctuating
oil prices and declining oil production. Such a fiscal strategy would
include some combination of the following:
- reduced spending
- use of Permanent Fund earnings
- economic development (i.e.,
growing the tax base)
- new broad-based taxes
- a buffer account to deal
with fluctuating oil prices
Institute of Social and Economic
Research, University of Alaska Anchorage
Mailing Address: 3211 Providence Drive, Anchorage, Alaska 99508
Physical Address: 4500 Diplomacy Drive, Suite 501, Anchorage, Alaska
January 9, 2003