Total Vermont tax revenues in the first half of Fiscal Year 2007 were exceptionally close to July 2006 projections (within about one-tenth of one percent), as the economy decelerated much as expected. This was due in large part to an exceptionally orderly retreat – at least to date – in housing and real estate markets, and offsetting strength in service industries and international trade.
Favorable energy price developments and restrained Federal Reserve Board interest rate hikes in the second half of 2006 kept the economy on an even keel, despite the inevitable correction in overpriced housing and real estate markets.
As the economic expansion enters its sixth year, however, the economy is increasingly vulnerable, and recession risks in 2007 have risen to 20%-30% (see chart on page 3). As a result of the very close tracking of tax revenues relative to prior projections, and little change in the external economic environment, most of the January 2007 update changes represent technical modifications and model adjustments to individual revenue categories. Net revenue adjustments in FY07 total only about $1M, with FY08 changes of approximately $18M for all three State funds.