Over the past two decades, Vermont has seen state spending grow at a rate significantly higher than its economic output, or Gross Domestic Product (GDP). In simpler terms, Vermont’s government spending is far outpacing the state’s ability to generate wealth through private sector growth. This widening gap raises some important questions about long-term sustainability and where Vermont is headed if this trend continues. While the state’s spending may appear sustainable for now, it’s likely a fragile balance that Vermont can only sustain temporarily before consequences become unavoidable.
The Spending vs. Growth Imbalance
From 2003 to 2023, Vermont’s state budget has grown at an estimated annual rate of 3-5%, and some years saw even larger increases, particularly during times of federal relief funding. By comparison, Vermont’s GDP grew at a much more modest average annual rate of around 1.2%. While these numbers may seem abstract, the key takeaway is clear: the state’s expenditures are consistently rising faster than the economic growth that funds them.
As an example, Vermont’s GDP grew from roughly $27.5 billion in 2003 to around $35 billion by 2023, representing about a 27% total increase over two decades (Statista). In contrast, the state budget increased at a significantly faster rate, more than doubling in size over the same period (VT Digger). This pattern isn’t unique to Vermont, but the impact is particularly pronounced in a small, rural state with limited industry and a shrinking labor force.
The Reliance on Federal Aid and Rising Taxes
To manage this discrepancy, Vermont has come to rely on significant federal funds. During the COVID-19 pandemic, for instance, federal relief temporarily boosted state revenues. But as those funds ebb, Vermont faces tough choices about how to sustain its current spending levels without that outside support (Vermont Finance Annual Report).
In recent years, Vermont has increasingly turned to other revenue sources to support state spending. This includes raising taxes, fees, and licensing costs and implementing more regulations on residents and businesses alike (BLS Vermont Economy Summary). While these measures provide some relief to the state’s bottom line, they also create a challenging environment for Vermont’s private sector—especially small businesses—by raising the cost and complexity of doing business here.
The Business Churn and Economic Impact on Businesses
One important measure that illustrates Vermont’s private sector health is something called the business churn rate. Business churn refers to the combined rate of new business formations and closures, essentially capturing the movement or “churn” within the economy. A high churn rate reflects a dynamic economy with active entrepreneurship, while a low churn rate can signal economic stagnation.
Vermont’s business churn has been relatively low over the past 20 years, with modest numbers of new business formations often offset by closures. This means that Vermont is not seeing the strong business growth it needs to support and expand its economy. Regulations, taxes, and fees can make it difficult for businesses, especially new startups, to survive long term. While Vermonters are innovative and entrepreneurial, the high costs and hurdles they face can stifle this growth and discourage business expansions or new ventures (BLS Business Dynamics Data).
A Simpler Path Forward
To address this imbalance, Vermont may need to consider adopting a “live within our means” approach, much like a household or business would. This could mean more carefully weighing new spending initiatives against the state’s actual economic growth. While it’s not an easy shift, aligning spending more closely with Vermont’s GDP growth rate could help prevent future reliance on temporary or external funding sources that may not always be there.
At the same time, Vermont might look at ways to support business growth rather than inadvertently hindering it. This doesn’t mean giving up on essential regulations or services, but it could mean revisiting the costs and processes businesses face. For instance, simplifying regulations, reducing fees where possible, and promoting a business-friendly environment could make Vermont a more attractive place to start and expand a business.
Encouraging Growth
The goal isn’t to sacrifice Vermont’s values or services, but to recognize that a healthy, balanced economy benefits everyone. Encouraging business growth means fostering job creation, increasing the tax base naturally rather than through increased rates, and building a more resilient economy.
If Vermont creates an environment where businesses can thrive, it can reduce its reliance on federal aid, build a broader tax base, and make the state more attractive to both residents and newcomers. In the long run, this could help ensure that Vermont has the resources to support the programs and services it values without placing an unsustainable burden on its residents.
Conclusion
In summary, Vermont’s current pattern of state spending growth outpacing private sector development may be barely sustainable now but could lead to significant challenges in the future. By realigning spending habits with actual economic growth and focusing on policies that support rather than hinder business growth, Vermont can create a more balanced and resilient economy. For Vermont to truly thrive, the solution may be to look inward, support the businesses and people who drive economic growth, and commit to spending within the means that growth provides.
Dave Soulia | FYIVT
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