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This is Governor John Baldacci.

When we began dealing with a slowing housing market and job losses, record-high oil prices, we knew that this winter was going to be difficult.

But the reality of just how bad things could really get have been illustrated over the last few weeks and the country’s growing financial crisis has crippled the credit market and driven Wall Street and Washington into spasms of panic and uncertainty.

Here’s what we know. Maine is not immune from a stumbling national economy. We’re not officially in a recession, but it certainly feels like it.

The predictions for later this year and early next year aren’t good. It’s possible that the gross domestic product for the entire country could shrink. And even optimistic predictions suggest it will be late next year before the national economy begins to recover.

Maine will not escape our national condition.

This week, the State Budget Office released a detailed report about what we can expect as we prepare for the State’s next two year budget, which takes effect July 1, 2009.

Right now, we have a balanced budget; we’re spending less money this year than we did last year; and we have been able to accumulate surpluses. But as we look over the next two years and the project revenues, we are also looking at the projected expenditures.

Commissioners have come forward with plans in their departments for current services to show that their costs for the next two years are going to be increased over revenues by about $508 million dollars.

So, that’s not a deficit. That’s projecting that Maine will have a structural gap of about $500 million dollars if we don’t balance the current services and the projected increases with the revenues that Maine will be gathering over the next two years.

And those revenues are estimated by a revenue forecasting team that is non-partisan.

Last year, they forecast that the State’s income for the next two years would fall short of earlier projections by almost $343 million dollars as a result of the recession and high energy prices.

The economic downturn, not outlandish State spending, accounts for the vast majority of our current gap.

New education spending and increases in health care costs account for the rest.

With the exception of the voter-mandated increases in education, which have required the State to spend over $800 million new dollars in the last four years, State government has essentially been flat funded.

We have forced efficiencies, restructured government and improved the way we deliver services and we’ve also reduced programs.

If Maine had not held the line on spending the last six years, our situation today would be much worse.

Rhode Island finished last year with a true deficit and still faces hundreds of millions of dollars of more cuts. The State’s unemployment rate has reached over 8.5 percent, and the housing market is in steep decline.

In September alone, Massachusetts fell $200 million short in revenue collections and the State’s structural gap has been estimated at more than $1.5 billion.

Even New Hampshire is expected to have revenues fall $200 million short by next summer. They are going to be $100 million short before the election in this current year.

So no State is escaping the national economy.

That’s why I have ordered every department in State government to prepare for a 10 percent reduction in spending.

The target is real. The exercise is serious.

I fully expect that when the Revenue Forecasting Committee revises its projection, we will see further reductions in collections.

So, the path ahead will be difficult.

But we are going to make our decisions with a few guiding principles:

We will adhere to the State statute that requires Maine to be at the national average for State and local tax burden.

That is why we have demanded more efficient K-12 school administrative costs. That is why we administered a single State correctional system, because 15 separate county systems were inefficient and too costly to our taxpayers.

While those decisions have helped to slow the onslaught of a slowing economy, it is very clear that we are going to have to do more.

Mainer’s are resilient. We are going to have to work together. We are going to have to do it with less dollars and we are going to have to have better results.

It is going to be a time that I believe will transform Maine, in terms of service to its people for its future, providing opportunities for children to be here and to have jobs, and we’re going to be able to protect the natural resources so we continue to be the place where more people come to set up shop, to operate businesses, to retire and relax and enjoy the wonderful resources we have in the State.

Maine will be known as an opportunity place along with being a vacation place.

I want to thank you for this opportunity to speak with you today

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