Savannah Chamber

21 enhancing technologies. In developed economies, the manufacturers that thrive will be extremely capital intensive, not very labor intensive, productive, and innovative. The minimum skill requirements for factory workers therefore will rise rapidly as manufacturers utilize much more sophisticated manufacturing technologies. That is especially true for the types of factories that will be built in the U.S.. The Georgia BioScience Training Center, which supports training for Baxalta's new facility, is a good example of providing much needed skills to Georgia's workers while simultaneously incentivizing life sciences companies. The Georgia Tech Research Institute and Georgia Tech's Manufacturing Institute promote growth advanced manufacturing and technology industries. The recent announcement that the Technical College System of Georgia will build an Aviation Academy in Paulding County will support the growth of Georgia's aerospace industry, which consists of over 800 aerospace companies. Prospects for State and Local Government Georgia's state government has adjusted spending and staffing to reflect available revenue, but several long-term fiscal challenges loom. These fiscal challenges – discussed below – will discourage state government from hiring very many additional workers in 2019 and beyond. State government spending and hiring will be a positive, but relatively minor, factor when it comes to supporting Georgia's 2019 GDP growth. The biggest challenge for state government financing is uncertainty regarding federal funding for mandated programs, especially Medicaid. Mandatory spending on Medicaid is crowding out spending on K-12 education, higher education, and infrastructure, three spending areas essential to boosting – or even maintaining – Georgia's competitiveness, productivity, and culture for innovation. The second biggest challenge is an antiquated tax structure that increasingly does not line up with the state's shifting economic structure. Consequently, when Georgia's economy expands state taxes do not generate as much revenue as a similar expansion would have generated in the past. This systemic slowdown in revenue growth is unlikely to go away without comprehensive tax reform. For example, Georgia's sales and use tax depends very heavily on the sales of goods and exempts many services. Increasingly, that is a problem because consumer spending is strongly trending away from taxable goods and towards tax-exempt services. In addition, goods-price inflation is, and will continue to be, much weaker than service-price inflation. Indeed, we have recently seen several straight years of deflation in goods prices. Overtime, legislated exemptions have also substantially eroded the sales and use tax base. Pension liabilities and state retiree health care costs are the third and fourth biggest challenges to state government financing. These long-term fiscal challenges will exacerbate the effects of the next recession on the state's ability to sustain core deliverables ranging from public safety, to education, and infrastructure. In 2019, the fiscal situation facing most local governments is better than the situation facing state government. Local government therefore will help to power Georgia's economic growth. Local government employment and programs will expand faster in 2019 than in 2018. Similar to state government, local government will struggle with reductions in federal funding, pension liabilities, and retiree health care costs. Compared to state government, however, local governments depend very heavily on property taxes and fees for services and less heavily on sales taxes. Due to the recovery of the property markets, most local governments have fully reconciled their ability to generate revenue with their spending and staffing levels. In 2019, most will have the financial resources needed to expand programs and hiring. Real estate prices have risen off their recessionary lows and have fully recovered in many, but not all, markets. In 2019, real estate prices will continue to outpace the overall rate of inflation, which bodes well for future increases in assessed property values. New home construction also will be on the upswing in 2019, which will lead to the expa nsion of property tax bases. Since, assessed property values tend to lag market values, local governments' property tax revenues should expand briskly in 2019. In addition, when the next recession comes, housing is unlikely to be its epicenter, suggesting that property values and in turn property tax revenues will be steadier sources of revenue for local governments than in the wake of the Great Recession. Federal Reserve Policy Federal Reserve actions to increase short-term policy interest rates and decrease the size of its balance sheet will be a slightly stronger headwind for Georgia than for the nation as a whole. The shift in Federal Reserve policy from an accommodative to a restrictive stance creates slightly more economic drag in Georgia than in many other states. That is because Georgians carry relatively more debt and have relatively less savings. In addition, interest-sensitive economic sectors (e.g. real estate development, home building, nonresidential construction, building materials manufacturing, and forestry) have a greater impact on Georgia's overall growth than on the nation's overall growth.

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