Question

The Alaska State budget is based primarily on the income from oil. The current price of oil is below all projections used to plan the budget and this is going to have devastating effects on the operating budget. Describe what factors should be considered in remedying the budget crisis we are going to face. How would you go about solving this? Taxes? Cuts? Using the Permanent Fund Dividend? Can you think of other sources of income for the State?

Answer 1

Taxes from oil are a primary source of income for the State. The State shall undergo a budget deficit of 584.9 million according to its fiscal summary of 2020-21.Economic recovery will help reduce the deficit but discretionary policy tightening is also needed.

The factors which must be analysed while remedying the budget crisis are:-

1)Economic recovery:Since unemployment is a major political issue, hence the State must look out for not clamping down recovery in hope of reducing budget deficit.

2)Impact on society;From an economic perspective cutting spending on Social security or permanent fund dividend  will have a positive impact on economic productivity as many people could be forced to join the labor force. However, cutting spending on welfare benefits will invariably increase the level of inequality and relative poverty as well as violence and substance abuse.

3)Inflation:If inflation rises unexpectedly, the government will pay out larger sums for welfare, unemployment, social security, and food and housing assistance.Inflation raises payments for indexed benefits, since their levels are by definition tied to inflation. Such unexpected expenditures will increase deficit spending and can affect how quickly a government can clamp down its extra ineffective programs. But on the other hand, inflation may eat out previous debt of the State.

Now, coming on to how to reduce this budget deficit.,The connventional advise will be to increase the tax rate, reduce the interest rate on loans and increase the salaries of workers to reduce the rate of stagnation and economic stagnation in order to spin the economy and help economic growth to increase. However this is a complicated issue to serious recession due to the pandemic.