Category Archives: India

India Budget Seeks 7-Year Low Deficit Amid Sops for Votes

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Proactively lowering demand with 9% unemployment
:(

India Budget Seeks 7-Year Low Deficit Amid Sops for Votes

By Unni Krishnan, Kartik Goyal and Siddhartha Singh

February 17 (Bloomberg) — Indias government pledged to reduce the fiscal gap to the lowest in seven years in an interim budget before elections due by May, while boosting defense spending and cutting taxes on cars, mobile phones and television sets.

The budget deficit will narrow to 4.1 percent of gross domestic product by March 31, 2015 from an estimated 4.6 percent in the current fiscal year, which is lower than an earlier target of 4.8 percent, Finance Minister Palaniappan Chidambaram told lawmakers today in New Delhi. The budget would provide funds for several months until a new parliament is elected.

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Emerging market currencies

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Seems no one is pointing out how this is all looking a lot like ‘catch up’ vs last year’s yen move?

As previously discussed, the proactive yen move from under 80 to over 100 vs the dollar- a 30% or so pay cut for domestic workers in terms of prices of imports- was an internationally deflationary impulse.

It’s called ‘currency wars’ with the exporters pushing hard on their govts to do whatever it takes to keep them ‘competitive’. And all, at least to me, shamelessly thinly disguised as anything but. And, in fact, it’s not ‘wrong’ to call it ‘dollar appreciation’ rather than EM currency depreciation given the deflationary bias of US (and EU) fiscal and monetary (rate cuts/QE reduce interest income for the economy) policy.

This is a highly deflationary force for the US (and EU) via import prices and lost export pricing power, also hurting earnings translations and, in general weakening US domestic demand, as increased domestic oil output doesn’t reduce net imports as much as would otherwise be the case.

And while I’m not saying energy independence is a ‘bad thing’ note that the UK has been largely ‘energy independent’ for quite a while, so there’s obviously more to it.

The optimal policy move for the US is fiscal relaxation- like my proposed FICA suspension- to get us back to full employment and optimize our real terms of trade. (and not to forget the federally funded transition job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment as the economy booms).

But unfortunately Congress is going the other way and making it all that much worse.

Emerging market currencies take a battering

By Katrina Bishop

January 24 (CNBC) — Emerging market currencies continued to take a beating on Friday — with Turkey’s lira hitting a new record low against the dollar yet again — amid growing concerns about the U.S. Federal Reserve’s monetary guidance.

On Friday, the dollar strengthened to 2.3084 against Turkey’s currency. Investors also piled out of the South African rand and Argentina’s peso, and both the Indian rupee and the Indonesian rupiah fell to two-week lows against the dollar. Meanwhile, the Australian dollar fell to $0.8681 – its lowest level in three-and-a-half years.

“The market is in panic mode. We have huge psychological fear that is going to emerging markets, despite a global environment that hasn’t changed that much,” Benoit Anne, head of global emerging market strategy at Societe Generale, told CNBC.

“My bias at this stage — although it’s a bold one — is that this is all about the credibility of the Fed with respect to its forward guidance. This fear that the Fed is going to tighten quicker than expected is translating into emerging markets.”

The U.S. central bank has promised that it will not raise interest rates until unemployment hits 6.5 percent – but some analysts are concerned that rate hikes could come sooner than expected.

U.S. monetary policy has always had a significant on emerging markets, and the Fed’s bond-buying program boosted risk sentiment, causing investors to turn their back on so-called “safe havens” and pile into assets seen as riskier – such as emerging market currencies.

Speculation of Fed tapering in 2013 hit emerging markets hard, with currencies including India, Turkey, Russia and Brazil coming under intense pressure in 2013.
But Anne added these recent moves were likely to be more temporary.

“It’s a matter of weeks rather than the whole year 2014 as a total write off for emerging markets,” he said. “Although it will take the Fed re-establishing its credibility towards forward guidance before we see respite in emerging markets.”

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comments on euro zone and india

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Do you think they know austerity causes loans to go bad?

Troubled loans at Europe’s banks double in value (FT) European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising. A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. Richard Thompson, a partner at PwC, said the “reshaping” of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets. He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012.

Do you think they know higher rates support higher inflation and weaken the currency?

India’s Central Bank Expects Inflation to Remain Stubborn (WSJ) The Reserve Bank of India Monday sounded concern about inflation, which it said would remain outside its comfort zone this fiscal year. In its half-yearly review of macroeconomic and monetary developments, released a day before its monetary-policy meeting, the RBI also highlighted the need to boost economic growth. But its stress was more on inflation. Inflation at the wholesale level—the main measure of prices in India—notched a seven-month high of 6.46% in September. It has remained above the central bank’s comfort level of 5% for four consecutive months through September. The RBI said it expects both consumer and wholesale inflation to remain around their current levels. “This indicates persistence of inflation at levels distinctly above what was indicated by the Reserve Bank earlier in the year,” it said.

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Barack Obama mounts big push to bolster FDI in US

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FDI is a function of employment. Note how high it was when unemployment was lowest. It’s about being able to make money here and not that we actually need fdi for anything, as we can instead relax fiscal

Barack Obama mounts big push to bolster FDI in US

By James Politi

October 27 (FT) — President Barack Obama wants to attract more foreign investment in the US

President Barack Obama and his senior cabinet officials are mounting a big push to bolster foreign investment in the US – amid evidence that America is falling behind other countries in the race for global capital.

The move by Mr Obama to pitch America as open for business is more aggressive than usual from the White House, reflecting a growing realisation in Washington that the case for investing in the world’s biggest economy is no longer self-evident.

In 2000, the US held 37 per cent of the worldwide inward stock of foreign investment but by 2012, that share had dwindled to just 17 per cent. The US attracted $166bn in foreign direct investment in 2012, a 28 per cent decline compared with 2011 and slightly below 2010 levels.

This year’s performance could be even weaker, since in the first six months of 2013, the US brought in $66bn in foreign investment, well behind the $84bn of the first half of 2012.

The FDI push comes after this month’s fiscal crisis – involving a 16 day government shutdown and a brush with debt default – that has raised eyebrows around the world about the US ability to manage its economy and caused nervousness in global markets.

Mr Obama and senior figures in his administration will ask foreign investors to shrug off the country’s political paralysis and weak economic recovery this week, when they speak at a conference in Washington, the first of its kind by the commerce department, uniting foreign investors with US economic development agencies and state and local officials.

Jack Lew, the Treasury secretary, John Kerry, the secretary of state, Mike Froman, the US trade representative, and Penny Pritzker, the commerce secretary hosting the event, are poised to speak at the event on Thursday and Friday.

“On the heels of the manufactured crises in Washington, it’s time for folks to come together and focus on doing everything we can to spur growth and create new high-quality jobs,” the White House said on Friday.

The US federal government has generally shied away from any big initiatives to promote foreign investment, leaving that task to states competing with each other for business.

Indeed, the high-profile effort by the Obama administration to lay out a welcome mat for foreign capital marks a reversal after years when Washington took for granted that any investors or companies seeking a global presence could not avoid putting money into the US.

But that reality has changed, with the growth of emerging markets from China to India to Brazil, which has dramatically heightened the competition.

Foreign investment inflows have fallen across many of the countries in the OECD, the Paris based group that aims to promote sustainable growth, but in the US that drop has been more pronounced than the average of advanced economies.

“The administration is focusing on FDI as an economic priority because the US has been losing ground,” says Nancy McLernon, president of the Organization for International Investment, which represents US subsidiaries of foreign companies.

The hard case to make is that the US political act is in order. The way that the US has handled things – on fiscal policy and, frankly, monetary policy – has not exactly been confidence-inspiring – Clay Lowery, Former senior US Treasury official

“I think there is a positive political environment to encourage foreign investment of the likes I have not seen over the past two decades”, she adds

The argument for investing in the US has traditionally been that it enjoys a huge and wealthy consumer market, large and liquid capital markets, and a predictable legal system. The domestic energy boom, driven by shale gas, has added to the country’s attractions.

But otherwise, the country’s competitiveness appears to have taken steps backwards. Its corporate tax system remains a morass, with a top rate of 35 per cent that can be scary to prospective investors, even if they might end up paying less by taking advantage of tax breaks.

The country’s infrastructure is in desperate need of retooling and there are growing fears about the education system’s capacity to develop a well-trained workforce. Moreover, political dysfunction in Washington, laid bare by the 16-day government shutdown and close brush with default , have damaged the case for investment in the US.

“The hard case to make is that the US political act is in order. The way that the US has handled things – on fiscal policy and, frankly, monetary policy – has not exactly been confidence-inspiring,” says Clay Lowery, vice-president at Rock Creek Global Advisers, and a senior US Treasury official under George W Bush.

“If you’re an overseas investor, one of the best things about the US was you always knew what the rules of the road are and we have taken away some of that policy stability,” he says.

Moreover, the country’s desire for foreign investors has been called into question after severe political backlashes to high-profile foreign acquisitions, especially from China and the Middle East.

Typically, foreign investment into America has come mostly from European countries, whose sluggish economies have led to weaker flows into the US. This means another objective for the US is to diversify its sources of foreign investment and attract more from emerging markets.

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Global Trade Flows Show Exports Are No Magic Bullet

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It’s those pesky accounting identities again.

With govt deficit reduction, it’s up to domestic credit expansion to offset the demand leakages.

Global Trade Flows Show Exports Are No Magic Bullet

By Simon Kennedy

October 25 (Bloomberg) — When HSBC Holdings Plc’s economists from around the world recently pooled their forecasts, virtually all had a similar source of growth in mind for the region they monitored: exports.

The impossibility of every nation being able to sell more than it buys means some of the analysts must be wrong — unless the rest of the solar system becomes a source of demand for the globe’s products, Stephen King, HSBC’s chief economist, told an Oct. 16 conference in London, flashing a slide of the planets.

“Export claims are just far too optimistic,” said King, a former U.K. Treasury official.

The bet on trade is flopping for companies and policy makers who had hoped it would power recoveries held back by weak domestic demand. This week alone, Caterpillar Inc. (CAT) and Unilever (UNA) complained of sliding overseas buying and data showed global trade volumes fell in August by the most since February.

Trade is falling short as emerging markets from Brazil to India slow and the dollar resumes a slide abetted by the Federal Reserve’s maintaining stimulus. The deterioration in cross-border commerce could provoke a response from policy makers eager to protect their expansions and even clashes between them if it endures, said Simon Evenett, professor of international trade at the University of St. Gallen in Switzerland.

“Trade would have picked up much more in a normal recovery,” Evenett said in a phone interview. “The outlook is more of the same as there is much more economic uncertainty than at the start of the year.”

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Emerging Nations Save $2.9 Trillion Reserves in Rout

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Smart not to intervene and use reserves.

And even the 19% isn’t as much as Japan’s recent approx. 25% drop, so they all remain stronger vs the yen. So the US now loses ‘competitiveness’ vs a whole mob of exporters cutting ‘real’ wages vs US, Canada, UK, and the Eurozone etc. As the ongoing global race to the bottom for real wages continues…

And maybe some day they’ll figure out that cutting rates supports a currency as it cuts interest paid by govt, making the currency ‘harder to get’.

And that exports are real costs and imports real benefits.

And that real standards of living are optimized by sustaining domestic full employment with fiscal adjustments.

Emerging Nations Save $2.9 Trillion Reserves in Rout

By Jeanette Rodrigues, Ye Xie and Robert Brand

September 4 (Bloomberg) — Developing nations from Brazil to India are preserving a record $2.9 trillion of foreign reserves and opting instead to raise interest rates and restrict imports to stem the worst rout in their currencies in five years.

Foreign reserves of the 12 biggest emerging markets, excluding China and countries with pegged currencies, fell 1.6 percent this year compared with an 11 percent slump after the collapse of Lehman Brothers Holdings Inc. in 2008, data compiled by Bloomberg show. The 20 most-traded emerging-market currencies have weakened 8 percent in 2013 as the Federal Reserve’s potential paring of stimulus lures away capital.

After quadrupling reserves over the past decade, developing nations are protecting their stockpiles as trade and budget deficits heighten their vulnerability to credit-rating cuts. Brazil and Indonesia boosted key interest rates last month to buoy the real and rupiah, while India is increasing money-market rates to try to support the rupee as growth slows. Central banks should draw on stockpiles only once currencies have depreciated enough to adjust for the trade and budget gaps, according to Canadian Imperial Bank of Commerce.

“If fundamentals are going against you, it’s not credible to defend a currency level — investors would rush for the exit when they see the reserves depleting,” said Claire Dissaux, managing director of global economics and strategy at Millennium Global Investment in London. “The central banks are taking the right measures, allowing the currencies to adjust.”

‘Fragile Five’
The South African rand, real, rupee, rupiah and lira, dubbed the “fragile five” by Morgan Stanley strategists last month because of their reliance on foreign capital for financing needs, fell the most among peers this year, losing as much as 19 percent.

Foreign reserves in the 12 developing nations including Russia, Taiwan, South Korea, Brazil and India, declined to $2.9 trillion as of Aug. 28, from $2.95 trillion on Dec. 31 and an all-time high of $2.97 trillion in May, data compiled by Bloomberg show. The holdings increased from $722 billion in 2002.

The figures don’t reflect the valuation change of the securities held in the reserves. China, which holds $3.5 trillion as the world’s largest reserve holder, is excluded to limit its outsized impact.

In the three months starting September 2008, reserves dropped 11 percent as Lehman’s collapse sent the real down 29 percent and the rupee 12 percent. India’s stockpile declined 16 percent during the period, while Brazil spent more than $14 billion in reserves in six months starting October, central bank data show.

‘Contagion Potential’
“Often, on the day of the intervention or its announcement, a currency will get a small bounce upward,” Bluford Putnam, chief economist at CME Group Inc., wrote in an Aug. 28 research report. “For the longer-term, however, market participants often return to a focus on the basic issues of rising risks and contagion potential.”

Putnam said “aggressive” short-term interest rate increases that “dramatically” raise the costs of going short a currency can work to stem an exchange-rate slide.

The Turkish and Indian central banks have developed tools to fend off market volatility while keeping their benchmark rates unchanged. Turkey adjusts rates daily and Governor Erdem Basci promised more “surprise” tools to defend the lira while vowing to keep rates unchanged this year. Since July, India has curbed currency-derivatives trading, restricted cash supply, limited outflows from locals and asked foreign investors to prove they aren’t speculating on the rupee.

Records Lows
India’s steps failed to prevent its currency from touching a record low of 68.845 per dollar on Aug. 28. The lira tumbled to an unprecedented 2.0730 the same day.

The rupee plummeted 8.1 percent in August, the biggest loss since 1992 and the steepest among 78 global currencies, according to data compiled by Bloomberg. The lira plunged 5.1 percent, the rand dropped 4.1 percent, the real fell 4.6 percent and the rupiah sank 5.9 percent, the data show.

The Indian currency rose 1.1 percent 67.0025 per dollar as of 1:46 p.m. in Mumbai today, while its Indonesian counterpart gained 0.3 percent to 11,409 versus the greenback. South Africa’s rand appreciated 0.8 percent to 10.2549 per dollar, while the Turkish lira strengthened 0.4 percent to 2.0505.

Interest-rate swaps show investors expect South Africa and India’s benchmark rate will increase by at least 0.25 percentage point, or 25 basis points, by year-end, according to data compiled by HSBC Holdings Plc. In Brazil, policy makers are forecast to raise the key rate by 100 basis points to 10 percent, and Turkey will lift the benchmark one-week repurchase rate by 200 basis points to 6.5 percent, the data show.

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Turkey’s Babacan Warns Of Financial Turmoil

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Turkey’s Babacan Warns Of Financial Turmoil

By Yasemin Congar

August 27 (Al Monitor) — Emerging markets will soon find themselves operating in a new world order. Few people are as painfully aware of this as Turkey’s Deputy Premier Ali Babacan.

A soft-spoken politician whose key positions in three successive Justice and Development Party (AKP) governments included a two-year stint as foreign minister, Babacan is currently the highest-ranking cabinet member responsible for the economy.

Needless to say, he was all ears when US Federal Reserve Chairman Ben Bernanke suggested on May 22 before the US Congress that it could begin to downsize its $85 billion-per-month bond-buying program.

Babacan had seen that coming. He warned Turkey repeatedly against overspending in 2012 — even at the risk of displeasing Prime Minister Recep Tayyip Erdogan — because he knew cheap loans would soon grow scarce.

Loans in lira are at whatever the CB wants them to be.

Indeed, the United States is getting ready to curtail the stimulus that has injected cash into emerging markets for the last four years.

QE isn’t about cash going anywhere, including not going to EM.

What they got was portfolio shifting that caused indifference rates to change.

Stocks plummeted at the news and national currencies fell against the dollar, with India, Brazil and Turkey all registering substantial losses.

Again, portfolio shifts reversing causing indifference levels to reverse.

Still, answering questions on live television on May 23, Babacan was as cool-headed as ever. First, he reminded the viewers that the European Central Bank and Bank of Japan would follow suit, thus making the impact of the Fed’s exit even stronger on Turkey. Then he said, “If they carry out these operations in an orderly and coordinated fashion, we will ride it out.”

Hope so. They need to focus on domestic full employment.

As Babacan would surely have known, that is a big if. Despite a recent call for coordination by the International Monetary Fund’s managing director, Christine Lagarde, sell-offs in emerging markets do not seem to be a major concern for the architects of the taper plan.

“We only have a mandate to concern ourselves with the interest of the United States,” Dennis Lockhart, president of the Atlanta Fed, told Bloomberg TV. “Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”

In fact, adjustment is not a question of choice here. Emerging economies will have to find a way to continue funding growth and paying off debt without the liquidity infusion. It won’t be easy.

Can’t be easier. Lira liquidity for their banking system is always infinite.

It’s just a matter of the CB pricing it. I’d suggest a Japan like 0% policy and a fiscal deficit large enough to allow for full employment.

The looming exodus of cash and higher borrowing costs have already caused permanent damage in Turkey. The lira weakened dramatically on Aug. 23, with the dollar surpassing two liras for the first time in history.

That was not what caused the decline.

The decline was from portfolio managers changing their indifference levels between the lira and the dollar or euro, for example.

Turkey’s Central Bank dipped into its reserves, but a $350 million sale of foreign exchange reserves failed to calm the market.

A mistake. No reason to buy their own currency with $ reserves, which should only be used for ’emergency imports’, such as during wartime. All the intervention did was support monied interests shifting portfolios.

Babacan, for his part, has been referring to Bernanke’s May 22 speech as a turning point. The global economic crisis has entered a new phase since that day, he said. “We’ll all see the spillover effects and new faces of the crisis in the coming months.”

What they will mostly see is the effects of their policy responses if they keep doing what they’ve been doing.

He did not stop there. In his signature straight-shooting manner, he also signaled a downward revision. “It should not be surprising for Turkey to revise its growth rate below 4%. … We set our annual exports target at $158 million, but it looks difficult to reach this target as well.”

Which opens the door for a tax cut/spending increase/fiscal adjustment to sustain output and employment.

A politician who seldom walks and talks like a politician, Babacan has been a maverick of sorts in the government. He entered politics in 2001 when he joined Erdogan and others to found the AKP. At the time, he was a 34-year-old with a degree from the Kellogg School of Management and work experience as a financial consultant in Chicago. In 2002, he was appointed the state minister for economy and became the youngest member of the cabinet.

Today, Babacan still has the boyish looks that earned him the nickname “baby face,” and he still exhibits a distaste for populism.

Guess he doesn’t support high levels of employment. In that case they are doing the right thing.

The most significant feature of Turkey’s recent economic success is fiscal discipline, and no one in the government has been a stronger supporter of that than Babacan.

Yikes! Kellogg school turns out flakes… :(

Around this time last year, when a fellow cabinet member, Economy Minister Zafer Caglayan — equally hardworking, yet keener on instant gratification — criticized the Central Bank’s tight monetary policy, Babacan slammed him.

“We do not have the luxury of pressing the brakes,” Caglayan had said. Babacan’s response: “In foggy weather, the driver should not listen to those telling him to press the gas pedal.”

The weather is clear, the driver is blind.

In what came to be known as the “gas-break dispute,” Erdogan threw his weight behind Caglayan and criticized the statutorily independent Central Bank for keeping interest rates too high.

Agreed!

Last week, the Central Bank hiked its overnight lending rate for the second month in a row by 50 basis points to 7.75%. Erdogan and Caglayan watched quietly this time, hoping the raise would help prevent the lira from sliding further. It did not.

Of course not. It makes it weaker via the govt spewing out more in lira interest payments to the economy.

As Babacan’s proverbial fog is slowly lifting to reveal a slippery slope, I can’t help but wonder if he feels vindicated by the turn of events. Probably not, since the risk that awaits Turkey now is worse than a taper tantrum, and Babacan must know just how bad it can get.

The Fed’s decision exposed Turkey’s vulnerability.

Yes, ignorance.

Described by economist Erinc Yeldan as “a gradually deflating balloon, subject to erratic and irregular whims of the markets,” Turkey’s speculative growth over the last four years has been financed by running a large current account deficit, which in turn was funded with hot money that is no longer readily available.

Nonsensical doubletalk.

As Standard Bank analyst Timothy Ash pointed out last week, “It is a bit hard to recommend [buying the lira or entering] bond positions while inflation remains elevated, and the current account is still supersized at $55-60 billion, with that huge external financing requirement.”

Or, it’s hard selling the dollar or euro with their intense deflationary/contractionary policies…

Estimated at $205 billion, or a quarter of Turkey’s gross domestic product (GDP), the external financing requirement is huge, indeed.

There is no such thing.

“A more extreme measure of vulnerability would add the $140 billion of foreign-held bonds and shares,” Hugo Dixon wrote in his Reuters blog. “If this tries to flee, the lira could plunge.”

Huh???

Babacan admits that “Turkey might feel the negative effects of the Fed’s policy shift a bit higher than others … due to our already higher current account deficit.”

Turkey’s reliance on hot money to turn over its short-term external debt, which has been increasing more rapidly than the national income, is only the tip of the iceberg. What makes Turkey’s robust growth rates of 9% in 2010 and 8.5% in 2011 unrepeatable might be the disappearance of cheap loans. However, the real reason behind the unsustainability of such growth is structural.

Growth can be readily sustained with lira budget deficits and a 0 rate policy would help with price stability as well.

From insufficient capital accumulation and a low savings ratio to poor labor efficiency, the Turkish economy suffers chronic ills that can only be cured through radical reforms, including a major overhaul of the education system.

Education is good, but unemployment is the evidence the deficit is too small.

Again, Babacan knows it. Earlier this year, he commented on the government’s plan to increase the GDP per capita to $25,000 in 2023 by pointing out an anomaly:

“No other country in the world with an average education of only 6.5 years has a per capita income of $10,500. And no country with such an education level ever had an average income of $25,000. Without solving our education problem, our 2023 targets will remain a dream.”

Some say ignorance is bliss. Listening to Babacan makes me think they may be right. After 11 years, being part of a government that failed to do what you know should have been done cannot be much fun.

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Asia Chart Alert: The destination of Asian exports – 30 Jul 2013

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We need more QE
:(

From Nomura:

Seven countries in emerging Asia – China, Hong Kong, India, Korea, Singapore, Taiwan and Thailand – have released trade data for June, and year-on-year export growth in six of these was negative, the exception being Taiwan. For the “Asian 7” in aggregate, export growth slowed from 7.6% y-o-y in April to 0.3% in May, and to -2.0% in June.

Of the Asian 7 all but India have released exports by destination, so from the remaining Asian 6 we can assess where demand for Asian exports is slackening. Earlier this year, Asian exports held up because weak shipments to Japan and the EU were offset by stronger shipments to the US, emerging Asia itself and the rest of the world.

However, in recent months there has been a broad-based weakening in Asian exports by destination. Even intra-Asian export growth has started to cool, in part due to China’s slowing economy. Much hinges on recoveries in some of the big advanced economies to counter ebbing growth in EM, but this has yet to show up in Asia’s export data.

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state deficit spending down

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Why Those New State Budget Surpluses May Not Last

By Mark Koba

June 20 (CNBC) — State coffers are building back up—some with record surpluses.

But experts warn that reduced tax revenues— along with a return to overspending—could jerk states right back into the red, and quickly.

“Some of the states’ deficit reduction is coming from economic growth, but most of it is coming from taxes,” said Elizabeth McNichol of the Center on Budget and Policy Priorities. McNichol authored a study this month on state revenue increases.

The increased revenues came about because many taxpayers front-loaded income into 2012 rather than 2013 in an effort to steer clear of tax plans mandated on the Congressional level, according to McNichol.

The danger for states is getting to depend on those revenues.

“While those taxes filled state budgets at least for now. there’s no guarantee they will be there in the future,” said McNichol.

“And with cutbacks in funding from the federal government and a slower economy, that could leave states high and dry if they squander surpluses on new government programs or premature tax cuts,” she said. “They could be back where they started.”

Disappearing Deficits

U.S. state budgets suffered their worst downturn in 70 years from the Great Recession, according to the CPBB. More than half the states had deficits.

But many budget declines are evaporating, if not completely disappearing.

In the midst of an energy and agricultural boom, North Dakota is projecting a $1.6 billion surplus over its two-year budgeting cycle. Texas projects an $8.8 billion surplus over its current two-year budget cycle.

Florida, forced to make deep spending cuts in recent years, projects a $437 million surplus. Ohio expects a surplus of $1 billion, and Iowa a $484 million surplus, according to the National Association of State Budget Officers.

The biggest turnaround may be in California. The Democratically controlled state legislature in Sacramento just approved a $96.3 billion budget, the third largest in state history, based on a projected surplus of nearly $4.4 billion. Only three years ago, California was running a $60 billion deficit.

Much of the credit for the surplus in the Golden State—coupled with spending cuts—goes to a tax increase voted on by California voters last November that ranged from 9.3 percent to 10.3 percent for individuals making $250,000 to 10.3 percent to 13.3 percent for those making at least $1 million annually.

Resisting the Urge to Squander

It’s not just California seeing higher taxes turn to healthier budgets. In the fourth quarter of 2012, according to the Nelson A. Rockefeller Institute of Government, all state tax receipts were up 5.7 percent from the fourth quarter of 2011.

The CPBB reports that the typical state has collected 8.9 percent more in personal income taxes so far this year than in the same period in 2012. Seven states Florida, Texas, Nevada, Washington, South Dakota, Wyoming and Alaska, don’t have a personal income tax.

But states are in danger of reversing their progress if they spend now or try turning surpluses into tax cuts.

“States have to work on a careful balance when it comes to taxes,” said Stanley Veliotis, a tax professor at Fordham University.

“On the one hand, they can’t raise taxes too high and force businesses and people to move to states with less taxes,” Veliotis explained. “On the other hand they can’t lower taxes too much and lose out on revenue.”

Some states are using their new found money to restore cuts in education and infrastructure—Florida is looking to increase teacher pay, and Tennessee is expected to spend more on health care and its prison system.

California is putting some of its money away for a rainy day fund besides increased spending on education and healthcare.

Others, like Ohio, Iowa and Indiana have lawmakers pushing for state tax cuts.

“States are thinking about cuts, but I think they need to wait and see whether economic growth can continue,” said McNichol. “It doesn’t make sense to cut taxes now if they’re such a main source of revenue.”

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