Budget Writers Shouldn’t Hope For Miracles

By John Hood

RALEIGH — During the just-completed primary campaigns for North Carolina General Assembly, you may have heard one or more candidates say that state government is currently operating without a budget. That is not, strictly speaking, true.

While the N.C. House and Senate were unable over the course of 2025 and early 2026 to negotiate a mutually agreeable spending plan for the current fiscal year, there has been no Washington-style government shutdown. Under a measure the legislature enacted several years ago, a budget impasse in Raleigh doesn’t keep state government from operating. It simply does so based on the last spending plan enacted by the General Assembly and signed by the governor.

Moreover, lawmakers can and do enact “mini-budgets” to fund specific needs in the absence of a full spending plan.

North Carolina operates on a July-to-June fiscal year. As of January 2026, the state has collected about $20.2 billion in General Fund revenues, including taxes and other sources, and expended $18.1 billion on General Fund programs such as education, health care, social services, and public safety. Despite the fact that lawmakers haven’t approved a new state budget, both revenues and expenditures are higher during the first seven months of this fiscal year than they were during the first seven months of the 2024-25 fiscal year.

Specifically, current spending is running 5% higher than last year. Current revenue is running about 2.4% higher.

Keep in mind that neither revenues nor expenditures are equally distributed through the year. Budget analysts and legislative leaders typically wait until the spring before drawing confident conclusions about North Carolina’s budget position and prospects. Moreover, if a budget deal is reached before the end of this fiscal year, there could be some retroactive expenses that change the underlying math.

Nevertheless, I feel comfortable offering the following observations, which likely comport with how most Republican and Democratic policymakers view the present situation.

For starters, there is no fiscal emergency. Even though tax cuts scheduled years ago have reduced General Fund collections against the baseline, revenues are still outpacing expenditures. So far this fiscal year, the General Fund’s unreserved credit balance — the amount of accumulated revenue minus any spending or transfers to other accounts — has grown, not shrunk, and totals $2.9 billion as of January 31. North Carolina also has $3.6 billion in its formal rainy-day reserve, plus hundreds of millions of dollars in other savings.

At the same time, however, there is no sign of a big fiscal windfall. When Congress passed its reconciliation bill last summer, it required North Carolina and other states to combat entitlement fraud, shoulder more of the cost of the Supplemental Nutrition Assistance Program (SNAP), and impose work requirements on able-bodied Medicaid recipients. It also limited the extent to which states can use assessments on hospitals to fund the state’s share of Medicaid (because such assessments can be little more than shell games, inflating hospital bills to draw down more federal money). Under the state law authorizing North Carolina’s Medicaid expansion, such a cap on hospital assessments should make the expansion go “poof.”

The administration of Gov. Josh Stein and its Democratic allies in the General Assembly are going to do everything within their power to retain Medicaid expansion. Some Republican lawmakers may do the same. Whatever they come up with, it cannot rely on unanticipated revenue growth that, based on current trends, would be a fanciful scenario.

The fiscal stakes are enormous. To preserve Medicaid expansion, keep up with rising health costs, cover the state’s share of SNAP, and fund other programs that one or both parties deem essential would add several billions of dollars a year to the state budget.

If that’s what Governor Stein and the General Assembly decide to do during the 2026 short session or 2027 long session, they’ll have to find sizable cuts in other state programs, impose big tax increases, or do some combination of the two. There’ll be no revenue miracle. And Washington is broke.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).