With the economy continuing to sputter, state government is going to have to spend $600 million in reserves just to pay its bills for the recently completed fiscal year.

And the outlook doesn't look a whole lot better for fiscal 2009, which started July 1.

State tax collections were down 9.4 percent in June, the final month of fiscal 2008. They were off 1.1 percent for the entire fiscal year.

Collections of corporate income taxes and sales taxes — particularly on materials used in construction — dropped the most. That decline mirrors a national housing downturn that has hobbled the economy in many parts of the country.

Gov. Sonny Perdue said because of the tax collection decline, the state will have to use $600 million of its $1.5 billion reserve fund to balance last year's budget.

In anticipation of the slow economy, the governor already had ordered state agencies to come up with plans to cut 3.5 percent of their budgets this year.

Most state spending goes for education, public health care and prisons. For now, the governor has exempted most kindergarten through high school education as well as public health programs from those proposed cuts.

But that exemption may not stick if the economy weakens further.

"If the bleeding doesn't appear to be stopping, we'll have to look at all those options," Perdue told reporters.

"I think it's important for us to get ahead of this thing. There is no emergency. There will be some tough choices in the '09 budget over where we take these reductions."

During the past 35 years, overall collections have fallen only during fiscal years 2002 and 2003, said economist Roger Tutterow of the Stetson School of Business at Mercer University. Adjusted for inflation, the 'real' level of collections also fell during two recessions, in 1991-92 and 1980-81, he said.

Tax revenues not only fuel government, they also are a window on the larger economy.

Personal income taxes rise when companies add new jobs and people get raises. Sales taxes go up when consumers feel flush enough to boost spending. And corporate income taxes tick up when business is growing.

But in tough times, the flow from these spigots gets weaker.

"What we are picking up is that the national economy has been slowing down, and that is having repercussions in Georgia as well," Tutterow said. "The job situation in Georgia is a little better than the national picture — but not a lot."

State unemployment is up, but jobs are still being added, according to the state Labor Department. Georgia added 9,400 positions in May, while the jobless rate climbed to 5.7 percent. In May 2007, the state added 14,400 positions, and the jobless rate was 4.3 percent.

The state's economic slowdown started in the fall, as sales of homes slowed and new home construction virtually ceased.

Tax revenues really didn't suffer until the fourth quarter. That means that comparisons to the previous year will look even worse for the next few months, Tutterow warned.

Economic projections forecast modest growth the rest of this year. Few economists predict recovery until 2009, with many suggesting it will be late next year — and none too robust a rebound.

Perdue has been here before. He came into office in 2003 facing a shortfall of more than $600 million. After two years of slashing spending, he was able to build up state reserves from almost nothing to $1.5 billion now.

When the softening of the economy began accelerating during the first half of 2008, Perdue lowered his estimate of the revenue the state expected to take in. That essentially cut the amount of money lawmakers could appropriate. But it turned out that wasn't enough.

In the final three months of fiscal 2008, overall tax collections were down 7.3 percent over the same period in fiscal 2007, according to the Georgia Department of Revenue.

Corporate income taxes plummeted 26.7 percent, and sales tax collections fell 8.6 over the same months in fiscal 2007.

Perdue said the state and national economy is going through so much right now that it's hard to predict what will happen.

"We have wise economists in this state but ... in times of great changes in momentum, economic forecasts are not all that accurate or helpful," he said. "So you're somewhat flying by instruments."

Because of conservative budgeting and large reserves, Perdue said Georgia is in better shape than most states.

A recent National Governors Association and National Association of State Budget Officers report showed 13 states had to cut into their budgets in fiscal 2008 to make ends meet. That was up from three states the previous year. This fiscal year, 19 states expect to spend less money than they did in fiscal 2008.

Legislative leaders in Georgia said the state has no choice but to slow spending.

"Now is the time to drive down costs and focus our efforts to do more with less," said Lt. Gov. Casey Cagle, president of the state Senate.

Senate President Pro tem Eric Johnson (R-Savannah) said, "Georgia will do what families across this state are already doing — adjust our priorities and tighten the belt."