Pennsylvania’s economic situation coming out of the COVID-19 recession is more positive than economists were estimating in November, but trouble could lie ahead when lawmakers work to develop a balanced spending plan for the 2021-22 Fiscal Year.

This was the message conveyed last week as the Independent Fiscal Office presented its Economic and Budget Outlook for Fiscal Years 2020-21 to 2025-26. IFO Executive Director Matthew Knittel said during a virtual briefing that their projection for the end of the current Fiscal Year is a balance of $1.5 billion – far better than the “zero” on the General Fund financial statement that was estimated in November. Knittel said this change was based on the improved economic outlook and the stronger-than-expected revenue collections that have come in in the months since.

However, Knittel acknowledged that the current year’s budget was balanced with one-time fund transfers and federal stimulus funding, which means lawmakers likely face a significant structural deficit next year. The IFO’s outlook forecasts a $2.5 billion deficit for the coming fiscal year – absent any potential federal dollars appropriated by Congress to help states through the current economic situation. The IFO also warned that most of the state’s job losses since spring 2020 are likely to take longer to return, if at all, which can present employment problems that could reverberate for years.

According to a Capitolwire story that did a deep-dive into the IFO’s outlook, Pennsylvania’s latest employment data (for November) shows 455,000 fewer people employed than a year ago, a number that could rise when December data is released. Knittel opined that a concurrent rise in productivity simply means employers have become more productive from recent changes they’ve implemented and he’s doubtful that many of those lost jobs will return. “It’s a permanent loss to a lower growth path, and that’s one of the main things that’s driving the larger structural deficit,” Knittel said.

The IFO also said the federal stimulus passed in December helped offset the drop in business activity in 2020 and injected $52 billion into the economy. However, the office projects that while an improved economy will help restore wage income and employment, it won’t be enough to offset losses in federal assistance programs and an overall drop of $5 billion in cash income, unless additional federal stimulus dollars are provided.

Beyond FY2021-22, lawmakers will have to account for a new transfer of $469 million of sales and use tax revenue from the General Fund to the Public Transportation Trust Fund, but by FY2022-23, the IFO forecasts revenue growth will begin to exceed expenditure growth (which the IFO says will contract somewhat due in large part to an expected decline of the school age population), helping to slowly shrink the structural deficit.