Unlike the federal government, the state of Hawai'i is not legally allowed to amass huge budget deficits that jeopardize the well-being of future generations. The wisdom of that law is easy to understand, because it protects taxpayers from financial calamities brought on by out-of-control spending.

As governor, I have made many tough financial decisions while leading our state through good economic times and bad. My job was much easier when revenues were up and headlines announced budget surpluses as opposed to the unprecedented budget deficits we face today.

In this, my eighth and final year as Hawai'i's chief executive officer, Hawai'i's financial situation, due to the lingering global economic crisis, is challenging at best. Our state faces a staggering revenue shortfall for the current biennium, and projected deficits loom larger in coming years.

As bad as this news is, our financial situation would be far worse if my administration had not maintained tight controls on spending. If I spent all the money the Legislature appropriated over the last two fiscal years, the state's budget gap would have grown by an additional $604 million.

One way to solve our budget crisis is by increasing revenues. Unfortunately, many legislators want to bring in more money by forcing higher taxes on individuals and businesses, including a $1 tax on every barrel of oil shipped to our state.

That is a dangerous path that would kill jobs, reduce the state's bond ratings and create cash flow problems, just like we're seeing in New York, Illinois and New Jersey.

One of the Legislature's worst ideas is enacting a one-point hike in the general excise tax, which equals a stunning 25 percent tax increase. This would be highly detrimental to our residents and businesses. It is clearly counterproductive and regressive.

Hawai'i residents are already among the most heavily taxed in the nation, and our tax laws are particularly hard on the poor. Moreover, hiking the excise tax, as certain legislators advocate, would be especially painful for those who can least afford an added financial burden.

A far better approach is to spur economic activity by encouraging the growth of sustainable, good-paying jobs in the private sector. That is what my administration is accomplishing through a series of job-creation initiatives.

A key example of these unique programs to stimulate job creation is Hawai'i Premium Plus, which is already being hailed by top federal officials as a model that other states should adopt. This program, which begins in May, is designed to lower our unemployment rate by a full one percentage point by encouraging small- and medium-size companies to create 6,450 jobs.

The state will reimburse employers for half the health insurance premiums for one year for new employees hired off unemployment rolls. Instead of further burdening state finances by continuing to collect unemployment payments and enrolling in benefit programs such as Medicaid and welfare, these new hires will earn salaries once again and contribute to Hawai'i's economic growth.

Government can also balance its books by maximizing federal revenue. Our Department of Human Services is especially successful in this regard, and is currently working to secure up to $49 million in extra federal stimulus funds.

Inexplicably, however, the House Finance Committee wants to block DHS from drawing down these federal dollars, even as our state confronts a budget deficit of well over $1 billion.

Along with increasing revenues via job creation and federal revenue maximization, state government must balance its budget by bringing expenses under control. Our two biggest costs, by far, are employee salaries and benefits, and Medicaid health insurance benefits.

According to projections, we need to reduce labor costs by 5.5 percent to achieve balanced budgets in coming years. For current employees, that would be an improvement, since twice-a-month "furlough Fridays" currently amount to an 8 percent pay reduction.

Then there is the issue of Medicaid, which is hemorrhaging red ink in Hawai'i and across the nation. An increasing number of residents receive "Cadillac" health insurance through our Medicaid programs, which feature a rich array of benefits with no premiums, co-pays or deductibles.

Most of us cannot buy such gold-plated insurance policies, yet Hawai'i taxpayers are paying for nearly 235,000 Medicaid enrollees to receive this coverage for free.

Restricting Medicaid eligibility is not an option at this time, because Hawai'i would lose millions of dollars in enhanced federal funding. And reducing compensation for health care providers is not the way to go, because physicians and other health care providers would increasingly refuse to treat Medicaid patients.

That leaves us with the only sensible option of reducing Medicaid benefits to a sustainable and responsible level. No decisions about cuts have been made yet, but we are closely examining our options and seeking input from legislators and the public.

Looking ahead, I believe our state government will emerge smarter, leaner, and more effective when the economic crisis finally comes to an end. You have my pledge that my administration will continue to do all it can to strengthen Hawai'i's economy and fiscal position during my remaining time in office.