Frank Manzo IV
Despite many experts predicting a recession in 2022, 2023, and 2024, the United States has so far skirted a major economic downturn. One of these days, however, those economists who predicted three of the last zero recessions will get lucky and be right.
Indeed, risks remain elevated as the New Year approaches. The labor market is slowing, with employers posting fewer job opportunities than one year ago. Trade wars are potentially brewing, with the next president planning inflationary tariffs on imports that are projected to raise costs for households by between $2,000 and $3,400 per year. Economists currently forecast a 33% chance of a recession in 2025.
To be sure, these odds are way down from previous years. But when there’s a 33% chance of precipitation, most people pack an umbrella or raincoat — just in case. It’s no different for states, which must work to create resilient economies that can weather the next downturn — just in case.
For much of the past two decades, Illinois’ recession preparedness was wholly inadequate. Our “Rainy Day Fund” was empty, the budget was out of balance, and policymakers could do little about worsening unemployment.
But new research from the Illinois Economic Policy Institute and the Project for Middle Class Renewal at the University of Illinois reveals a major shift compared to where our state was during the last two major economic downturns — the Great Recession and the COVID-19 recession.
For example, Illinois has eliminated the massive budget deficits of past years, earned 9 credit rating upgrades since 2020, and built its largest-ever Rainy Day Fund at more than $2 billion. Our pensions have their highest funded ratios since 2008 thanks to $700 million in supplemental contributions and a successful buyout program.
Our state also is better positioned to combat a rise in unemployment. Illinois has a healthier Unemployment Insurance Trust Fund and recently launched WorkShare IL, which allows companies to reduce employee hours in lieu of layoffs, keeping workers employed and enabling them to receive prorated unemployment benefits. This work-share program lowers costs for taxpayers and saves jobs during recessions.
Finally, consider the robustness of our investments in the future. The state is investing $2 billion more per year toward education due to the Evidence-Based Funding model, resulting in 55% fewer school districts in deficit spending. Illinois also has passed sustainable infrastructure funding. Even if a recession hit tomorrow, the state would still be committed to investing $41 billion over the next six years, saving and creating good-paying construction jobs.
Put that (and more) together, and it’s clear that Illinois is significantly better prepared now than it was in the lead up to either the Great Recession or the COVID-19 recession.
Of course, the outlook isn’t all rosy. State agencies already are projecting a budget deficit of between $618 million and $3.2 billion next year. On top of that, public transit agencies are facing an impending “fiscal cliff,” with a $730 million to $1 billion hole that will need to be filled.
One potential solution could be to broaden the sales tax. States such as Iowa, Wisconsin, and Texas each tax more than 50 additional services than we do in Illinois, ranging from haircuts and dry cleaning to personal security and investment counseling. This proposal would generate the necessary revenue to continue funding infrastructure and education — essential investments that make our economy more resilient.
Illinois is not alone in dealing with these issues. Many are expecting budget imbalances next year, including Minnesota and Arizona. Others, such as Pennsylvania and California, are attempting to address public transit fiscal cliffs. No state in the nation is “recession-proof.”
Still, despite these headwinds, Illinois is better positioned to overcome these challenges and withstand the forces that trigger recessions than at any point in recent history.
That’s something that residents can cautiously celebrate and lawmakers should diligently build upon as we enter 2025.
• Frank Manzo IV, MPP is an economist at the nonpartisan Illinois Economic Policy Institute.