It's The Spending

One of first things Mayor Bloomberg needs to do is to disabuse himself of the notion that the city's budget gap is mainly "a revenue problem," as he put it soon after the election.

Yes, revenue projections have fallen sharply in the wake of the World Trade Center attack. But the city faced a budget gap even pre-9/11 - and the fundamental reason is spending.

The budget grew by 26 percent between fiscal 1997 and 2001, including nearly 9 percent in 2001 alone. As long the city was reaping record tax receipts from economic growth, this was no problem - in fact, a record surplus accumulated at the same time.

But once the economy cooled, spending was bound to catch up with revenues. Indeed, this is precisely what happened. Not counting prior-year surpluses, this year's city budget effectively contained a $2 billion operating deficit when it was first adopted in June.

To cut the budget, Bloomberg will need to reduce personnel costs both by selectively reducing the massive workforce, and by demanding much more productivity out of the employees who remain.

He'll also need to make major cuts in projected capital spending, which is otherwise slated to skyrocket over the next few years, driving up debt-service costs even further.

But the new mayor's most immediate test is on the tax front. On its way out the door last month, the lame-duck City Council refused to prevent the remaining Dinkins-era income-tax surcharge from reverting to a full 14 percent this year. The resulting tax hike could cost New York another 10,700 private sector jobs, according to a Manhattan Institute analysis.

Mayor Bloomberg can get off on the right foot by asking the new City Council to extend the 2001 tax law as its first order of business in 2002.