Budget boss paints a grim picture of city's economy.

In testimony in front of the New York City Council's finance committee, Ronnie Lowenstein, director of the Independent Budget Office, gave a grim estimate of the city's fiscal outlook.

According to the IBO, tax revenues will decline more significantly than the city has anticipated and exacerbate already serious budget deficits.

Lowenstein's analysis offered a succession of troubling predictions her agency has for the city's economy, including estimates that job losses will be worse than previously anticipated, the recession will last longer in New York City than the rest of the country and that Wall Street, one of its prime engine of growth and tax revenue, may have been dealt a long lasting blow by the recent upheaval in the financial system.

The IBO predicted that tax revenues could fall by $2.6 billion this year, the largest drop off ever. The decline would create a deficit of $4.8 billion, larger than the IBO's previous estimates of the city's deficit and $1.6 billion more than Mayor Michael Bloomberg's calculation of the shortfall in January. A further falloff in the economy would drive tax revenues down by another $1.3 billion in 2010 the IBO predicted.

Even despite an increase in property and hotel occupancy taxes in December 2008 and the Mayor's proposal to raise sales taxes in an effort to close the deficit by next year, Lowenstein said the IBO's "new lower tax revenue forecast implies there is still an additional problem that remains to be addressed."

A large part of the problem is the decline in Wall Street profits, which fed state and city coffers with unprecedented flows of cash in recent years as the industry netted record profits.

"From 2003 to 2007, when Wall Street profits were expanding along with the financial asset bubble, the city's business income tax receipts grew by 163.4 percent from $2.3 billion to $6.0 billion, by far the fastest growth in these taxes' history," Lowenstein read in prepared testimony. Last year however, those proceeds began to reverse sharply as the financial system was thrust into chaos and the economy plummeted. Business taxes in the city fell by 10 percent and Lowenstein said her office predicts that they will fall another 14.5 percent in 2009. From 2008 to 2010, the IBO predicts the collections will drop by $2.4 billion, what she said was "the fastest decline in history for these taxes."

And no sign of relief is in sight. Reorganization of the financial industry's business model to conform with lower risk methods for generating returns may hamper it for the foreseeable future from achieving the astounding profits it had earned in recent years before the economic crisis.

Wall Street profits in 2006 were almost $21 billion, a record high. But as mortgage defaults began to hit in mid 2007, the industry began to suffer and ended the year with a loss of $11.3 billion. The red ink plumed disastrously in 2008 with financial firms suffering a net $45.1 billion loss. The IBO said that the industry would lose $8.3 billion in 2009 before returning to more modest profitability in 2010, "averaging roughly $9 billion through 2013."

"But even when the national economy does rebound and the financial market revives, the financial industry is likely to be more highly regulated and employ less leverage, and therefore will almost certainly be less profitable," Lowenstein said. "If these structural changes occur, Wall Street will no longer generate the levels of city tax revenue that it has in the recent past."

Wall Streets problems are one of the lead drivers of a deteriorating labor market in the city, which the IBO said will shed 270,000 jobs through the second quarter of 2010, 30,000 more than the agency estimated in January.

Real estate taxes aren't going to pick up the decline in business and payroll taxes. Property transfer taxes, fuelled by a booming real estate market, rose from 2003 to 2007 from $1 billion to $3.3 billion. But as sales have ground to a halt amid the credit crunch and uncertain economic outlook, transfer tax revenues fell by 22.7% and the IBO predicts they will continue to spiral this year, by 40.3% and then by 22.1% in 2010.

"The city has entered what is expected to be a severe and protracted period of economic retrenchment which will lead to two consecutive years of tax revenue declines," Lowenstein said. "Even after the local economy begins to recover, and IBO expects the city's recovery to lag the nation's, tax revenue growth is expected to be much slower than we enjoyed in the years of expansion from 2003 through 2007. With lower tax revenue, a prior year surplus that will be largely expended this year, and continued spending growth in large parts of the budget that are not immediately controllable by the Mayor, IBO expects the city to face an ongoing challenge to meet its legal requirement to produce annual budgets that are balanced."