The Maryland state government has less money to work with than expected going forward, as the economy continues to settle from a boom fueled by two years of federal pandemic aid.

The revisions to the economic forecast were discussed in two meetings in Annapolis on Thursday. Here’s a look at what’s going on with the state’s economy and finances, and what it all means.

How bad is the financial picture?

The state government budget is still growing from one year to the next, it’s just not growing as much as previously anticipated. Forecasters are now expecting 2.1% growth in the current budget year, which runs through June 30, and 1% growth for the budget year beginning July 1.

That means the state will have about $77 million less to spend from now through June 30 than was expected at the last revenue forecast in December. Then for the next budget — July 1, 2023 through June 30, 2024 — there will be $400 million less than expected.

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When the estimates of how much money is coming in changes, that’s called a “revenue write-down.”

Why does the state have less money?

There are many factors that go into how much money the state has, because the government gets money from a variety of sources, including sales taxes, corporate taxes, paycheck taxes and taxes paid on non-paycheck income.

Employment trends, consumer habits and general economic factors all play into how much taxes are paid in those different categories.

Economists are predicting less money coming in from three categories: Sales tax, paycheck withholding tax and taxes on non-wage income, which includes people who pay quarterly estimated taxes on their income.

Those quarterly payments were strong for the first three quarters of the year, but the fourth quarter had “a sharp and sudden decline,” said Robert J. Rehrmann, director of revenue estimates for the state.

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That type of revenue is the least predictable, and it’s a big factor, making up about 20% of the state’s general fund.

“This is not a revenue source that you can lock up into the bank,” Rehrmann said.

Rehrmann and his team are also predicting that the sales tax will bring in less money than previously expected, because consumer spending is slowing. That’s due in part to the Federal Reserve’s steps to cool the economy to reduce inflation.

On the other hand, corporate taxes are strong, and that was actually adjusted to be slightly more going forward.

“It does seem interesting that corporations are making more money and people are not,” noted Del. Ben Barnes, a Prince George’s County Democrat who chairs one of the General Assembly’s budget committees.

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So why does this matter?

The governor and state lawmakers are working on a budget that will dictate where the state spends its money.

Gov. Wes Moore’s first budget proposal, made in January, included a large amount of money in the state’s Rainy Day Fund as well as in an unassigned surplus of $820 million. Some lawmakers may have had their eye on that surplus money to fund various projects or ideas.

That’s now less likely to happen, Moore’s budget secretary, Helene Grady, warned. The surplus has now shrunk to $342 million, which needs to be reserved in case the economy worsens.

“Put simply, today’s report means we have significantly less capacity to fund new initiatives and supplemental budget requests for the upcoming fiscal year ‘24 than we thought we might have as recently as mid-January,” Grady said.

State lawmakers who are reviewing Moore’s budget proposal will have to factor in the revised numbers before they put their finishing touches on it. The House of Delegates will vote on the budget first, followed by the state Senate.

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Republican senators issued a statement urging the General Assembly to rein in spending by using their newly gained authority to move money around in the state budget.

If the Democratic governor and the Democratic majority in the legislature keep spending, that could set up Marylanders for tax increases down the line, something that lawmakers have a “moral responsibility” to avoid, the Republicans said in a statement.

The state needs to balance the money coming in with the money going out, and the newest numbers indicate that going forward there will be an ongoing shortfall that will need to be fixed.

One of the long-term challenges is paying for the Blueprint for Maryland’s Future, an ambitious and expensive plan to improve public schools. Various sources of money, including part of the sales tax, pay for the Blueprint programs. There’s enough money forecasted for the next few years, but there’s not going to be enough for 2026 and beyond.

“It exacerbates a problem that was already there,” said David Romans, a nonpartisan budget analyst who advises lawmakers.

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Are we headed for a recession?

The numbers are preliminary and don’t necessarily indicate long-term trends. But the data “does not indicate at this point that a recession is imminent,” said Rehrmann, the chief revenue forecaster.

Even so, the newest information should be “a flashing yellow light” that officials must consider carefully, said Comptroller Brooke Lierman, a Democrat.

She added that the state is not in a precarious position.

“It’s not all bad news. We still see growth for the next few years,” Lierman said.

Another bit of good news is that the state’s bond rating — which is basically the government equivalent of a personal credit score — remains AAA, the highest possible. That means that when the state government borrows money in the form of bonds, it will get the best interest rate possible — and taxpayers will pay less.

“That still speaks to how strong, how resilient, how reliable Maryland’s economy remains,” said state Treasurer Dereck Davis, a Democrat.