Arizona is facing a budget deficit, but it’s not as bad as the state’s financial advisers initially thought. 

In January, legislative budget analysts reported that Arizona would face a $1.7 billion shortfall over the next two years. But analysts on the state’s Financial Advisory Committee, which met Thursday, have revised those projections, down to about $1.3 billion. 

“The overall picture has improved about $400 million, but we still got a problem,” Committee Director Richard Stavneak told the panel.

Budget negotiations are ongoing between Republican legislative leaders and Democratic Gov. Katie Hobbs. Lawmakers like Sen. Mitzi Epstein (D-Tempe) have been waiting on the committee’s financial update in order to make concrete decisions in the negotiating process.

“It is good news to hear general optimism among the economists gathered, even with several caveats,” Epstein said in an email.

Epstein blames Republicans for the budget shortfall, pointing to a large tax cut and expanded universal school vouchers adopted under former Gov. Doug Ducey’s administration.

“This FAC meeting showed the deficit continues into FY27.  The chart is negative for four fiscal years. That’s not a cash flow problem. That’s irresponsible budgeting over the course of decades by the Republican majority in the Legislature,” Epstein added.

House Appropriations Committee Chair David Livingston (R-Peoria) did not respond to a request for comment.

Budget analysts reported that, in addition to the reduced shortfall, Arizona’s labor market is strong and inflation is moderated. 

However, they warned that housing affordability is extremely low.

University of Arizona Economic and Business Center Director George Hammond said high housing costs are cause for alarm because they make Arizona cities less competitive compared to other Western cities.

“Housing affordability can affect homelessness, this can impact household budgets in a way that affects consumer spending and it can also affect migration through its impact on these comparisons that migrants make; where should I move?” Hammond told the panel.

“Employers make decisions based on the cost of living, and ‘can I get employees, particularly the ones who want to relocate, to relocate?’” economist Alan Maguire said.