MONTPELIER — The work of balancing the state budget for the next year became much more difficult Friday when new revenue estimates ripped a $34 million hole in the spending plan now being considered by the Legislature.

The total decline in expected state revenue for the next year was in all $43 million, but about $9 million of that had been anticipated and is already taken into account in the budget now being worked on.

Revenue estimates also included a $14.6 million decline in state revenues for the current year, which ends with June. That will likely mean the Legislature will tap a $16 million reserve fund that serves as back-up for Agency of Human Services needs.

If the budget is out of balance by the end of the fiscal year, the "rainy day" reserve funds for the General Fund and Transportation Fund may be used more-or-less automatically, Gov. James Douglas said. Those funds contain about $60 million and $15 million respectively.

The joint report Friday by economists for the administration and the Legislature also had some worrisome news about the overall weakness of the state's economy. The recession is already in very bad shape, and the recovery may be slow and unsteady when it comes, Jeff Carr and Tom Kavet said.

"This will be the worst since the Great Depression," said Carr, the administration's economist. "What I am calling this now is the great recession."

New housing starts in Vermont have "dropped to levels we have never seen," Kavet said. Although the housing market in Vermont to date has not dropped as much as in other states, it is expected to see more of a decline in the future, the economists said.

Housing losses have been combined with a drop in retail sales that is simply "breathtaking," Carr added.

"We are forecasting for the first time ever back-to-back years of declines in the two largest consumption taxes," Kavet said.

The more immediate problem for lawmakers and state officials is the fiscal year 2010 budget, which outlines state spending for the coming year.

"We are not talking about a one year revenue problem," Carr said. "I have been doing this for 30 years and I have never seen anything like this."

Versions of the $4.5 billion state budget for the next year – and the roughly $25 million in new taxes necessary to support that spending level – have been approved by the House and Senate. To cover revenue shortfalls, the House relied primarily on increasing income taxes while the Senate approved some sales taxes on satellite television, liquor and tobacco.

Because of differences in spending and taxes, the final version of the bills will be worked out by two groups of six lawmakers in conference committees – one focused on spending, the other focused on tax changes. The administration will likely be involved in those negotiations as well.

Adding to the uncertainty, another revenue downgrade is possible when the state's Emergency Board and economists meet again in July.

Douglas has criticized lawmakers consistently for not cutting enough out of the state budget.

"I hope legislators will realize it is time to make some tough decisions," Douglas said. The administration did not propose new cuts, saying instead that the budget Douglas presented in January contained spending cuts that the Legislature has not taken up.

But Senate President Pro Tem Peter Shumlin, D-Windham, said that over the past year, spanning two state budgets, lawmakers have cut $110 million in state General Fund spending.

That doesn't really matter, administration officials countered, because when all sources of money — including federal stimulus funding — are included, spending would increase by more than 6 percent in the next fiscal year.

James Reardon, commissioner of finance, said he is encouraged that lawmakers are now talking about limits on Education Fund spending.

"They haven't made enough expenditure reductions," Reardon said. "We looked across all funds."

There will be more cuts on the way as the conference committees work on the budget and taxing plans, lawmakers said.

"We essentially have to scrub the entire budget," Speaker of the House Shap Smith, D-Morristown, said Friday, after learning of the latest revenue projections from the economists.

Another looming question is what will happen to more than 300 state employees who are slated to lose their jobs. The House passed a resolution calling on the administration and state workers' union to enter mediation to reach an agreement on employee concessions that could avoid layoffs. That resolution does not have the force of law, however, and there are limits on how much involvement lawmakers can have in negotiations between Douglas and the union.

"What I see as House Speaker is two parties talking past each other," Smith said.

Smith said he offered to host a meeting Monday with Douglas, Shumlin and Lt. Gov. Brian Dubie to start talking about the budget problem. Douglas is going to be out of town and there may be a meeting Tuesday instead, according to the administration.