The 2024 SC Sustainable Budget

South Carolina is getting on the right track when it comes to fiscal responsibility. In 2022, state lawmakers and Gov. Henry McMaster enacted the first-ever state personal income tax cuts, letting residents keep more of their hard-earned money and making South Carolina more competitive for business. Last year, voters also approved ballot measures requiring the state government to set more money aside in the event of an economic downturn. The next step is to get state spending under control, which can be achieved by following the Policy Council’s South Carolina Sustainable Budget (SCSB).  

The SCSB provides a limit for annual recurring general funds[1] appropriations using data based on the rate of state population growth plus inflation. This report provides appropriations recommendations for fiscal year (FY) 2024 and compares recent state appropriations with what spending would have looked like under a sustainable budget.  

Table 1. South Carolina Budget Limits for FY24

Based on population and inflation data in 2022, the recommended general funds appropriations limit[2] for South Carolina’s FY24 budget is $11.2 billion.

However, with inflation reaching a 40-year high, primarily because of the errant policies in D.C., this spending ceiling is higher than it would otherwise be under normal economic circumstances. Accordingly, the S.C. Legislature should consider freezing spending at the current FY23 budget amount of $10.34 billion. This would help to correct recent overspending seen in South Carolina’s budget and put our state on a more sustainable path. At a minimum, general fund appropriations in the FY24 budget must remain below $11.2 billion.

Overview

A sustainable budget, sometimes called a conservative or a responsible budget, is a model for state budgeting that limits appropriations based on population growth plus inflation. This metric serves as an indicator of what the average taxpayer can afford to pay for government provisions. In particular, it accounts for: 1) More people in the state who could potentially pay taxes, 2) Wage growth that’s typically tied to inflation over time to pay taxes, and 3) Economies of scale, as not every new person or wage increase should be associated with new government spending.

The SC Sustainable Budget does not make specific recommendations on how general funds should be appropriated. Rather, it gives legislators the flexibility to appropriate taxpayer dollars to government programs as determined by the General Assembly while ensuring that spending growth remains in line with what people can afford.

Such a voluntary spending limit is key to putting South Carolina in a position for further tax relief. In 2022, lawmakers cut and simplified our state personal income taxes – a policy supported by the Policy Council – and set up a trigger for additional, smaller cuts in the future. But smart budgeting will help accelerate the process of reducing income taxes and fuel other tax cuts. Unsustainable spending, on the other hand, could build pressure to reverse course and raise taxes, leaving South Carolinians with fewer opportunities to flourish.

SC Appropriations vs. Sustainable Budget

Figure 1 compares the previous eleven years[3] of South Carolina’s general fund appropriations (FY13 to FY23) to general fund appropriations if limited to the rate of population growth plus inflation, with the following results:

Figure 1. South Carolina General Fund Appropriations v. SCSB

11-year general fund appropriations: $86.9 billion (+69.9%)

11-year appropriations limited to population + inflation: $77.3 billion (+42.2%)

Notes. Budget amounts are based on data from South Carolina’s state budget publications, Fed FRED for state population growth and U.S. chained-CPI inflation, and author’s calculations. Appropriations did not increase from FY20 to FY21 because the state operated on a continuing resolution in FY21.[4]

Key takeaways (see Table 2):

1. The FY23 budget was above the SCSB by $1.6 billion. When summing the budget differences for each year over the period, state appropriations were $9.6 billion higher than the SCSB.
2. Appropriations grew by 69.9% from FY13 to FY23. If limited to the rate of population growth plus inflation, appropriations across the same period should have increased no more than 42.2%.
3. By not following the SCSB over this period, individual taxpayers carry an additional tax burden of about $300 for the FY23 budget, or $1,200 for an average family of four. But considering the cumulative $9.6 billion difference since FY13, individuals are paying almost $1,800 more while families of four face an additional burden of nearly $7,200.

Table 2. General Funds Appropriations Over Time

Note. Budget amounts are based on data from South Carolina’s state budget publications, Fed FRED for state population growth and U.S. chained-CPI inflation, and author’s calculations.

Follow the sustainable budget

As legislators begin working on South Carolina’s next budget, we strongly encourage them to follow the SCSB, which establishes a spending limit based on what the average state taxpayer can afford to pay for government services. The SCSB does not instruct lawmakers how to spend funds, rather its purpose is to keep overall spending from rising too quickly.

Such budgetary restraint will be vital going forward. In its November 2022 report, the S.C. Board of Economic Advisors forecasted $12.3 billion in general fund revenue for FY24, with expected revenue for FY23 being $12.5 billion – a 1.3% decline. Moreover, the FY23 revenue estimate is 8.7% less than actual revenues of $13.7 billion for FY22. If these estimates materialize, it will mark an end to years of major growth in state revenue collections.

The good news is that South Carolina is already taking steps to prepare for a rainy day. Voters recently approved two amendments to increase contributions to the state reserve funds – raising the General Reserve Fund from 5% to 7% and the Capital Reserve Fund from 2% to 3% of the previous year’s general fund revenue. By law, the reserve funds act primarily as a shield against year-end budget deficits.

By doubling down on smart policy and following the SCSB, our state will be in a much stronger position to cut taxes, avoid the tremendous cost of unchecked government growth, and allow citizens to prosper and reach their fullest potential.

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Bryce Fiedler is the senior policy analyst at the South Carolina Policy Council. Vance Ginn, Ph.D. is president of Ginn Economic Consulting where he advises multiple free-market think tanks, and was formerly the associate director for economic policy at the White House’s Office of Management and Budget (OMB).

[1] General funds are used because this is the source of revenue state lawmakers have most discretion over during the budget process. When looking at all funds (general funds + other funds + federal funds), appropriations surpassed the sustainable budget threshold between FY17 to FY23.

[2] The SCSB spending limit is calculated based on the rate of the state’s population growth plus U.S. chained-consumer price index (CPI) inflation as measured during the previous year (2022). In this case, the estimated growth rates are population growth of 1.14% and U.S. chained-CPI inflation of 7.21%. These sum to a maximum growth limit of 8.35%. When applied to South Carolina’s FY23 general funds budget of $10.34 billion, the FY24 limit is $11.20 billion.

[3] FY13 was selected as the base year for this comparison as it was the first year in the first SCSB report.  

[4] In spring 2020, the General Assembly passed a continuing resolution extending FY20 state appropriation amounts through FY21. The resolution authorized necessary funding for state procurement, debt obligations, and 2020 election expenses. It also authorized $201.5 million from the Contingency Reserve Fund for Covid-19 response efforts. However, as no general appropriations bill was passed that year, FY20 and FY21 appropriation amounts were kept the same for this report.