State Fiscal Woes in Perspective
Much has been written about the distress in state finances over the past year – usually in the most sensational terms. But while state difficulties are indisputable, the economic repercussions are far less than advertised.
First, let’s acknowledge the bad news. State receipts fell short of initial projections in 30 of 50 states during the fiscal year ending in June. Consequently, spending was trimmed through targeted and across-the-board cutbacks that often affected essential programs, including K-12 education and assistance to the needy. In total, state spending increased by a meager 0.3%, and 100,000 jobs were eliminated. According to the National Association of State Budget Officers, the outlook for the fiscal year ahead entails a spending decline of 0.1% and still more job losses.
Now consider the following. Because property values have been rising nicely in recent years – and assessments are the single greatest source of municipal government receipts – the fiscal situation at the local level isn’t nearly as dire. Hence, our city and town halls actually increased payrolls by 106,000 jobs, fully offsetting declines at the state level. And since the division of responsibilities between state and local governments varies from state to state, it truly makes sense only to consider the two combined.
Looked at this way, combined state and local revenues increased 5.6% over the year ending in March – not too shabby for a “crisis” – and up nicely from the 2.1% gain during the recession of 2001. To be fair, federal grants have been on the rise, so that figure would drop to 5.1% if considered solely on the basis of “own source” revenues.
As for expenditures, state and local governments increased spending 6.2% over the same period, which could hardly be described as austere. And even if we recognize the heavy burden that accompanies elevated outlays for unemployment insurance and other “transfer” programs, spending was still up a decent 5.1%.
Nonetheless, receipts haven’t kept up with spending, and state and local government is now running in the red. Its operating deficit amounted to $55 billion last year and is running at the $65 billion pace so far in 2003, which translates into an all-time high 0.6% of GDP. Surely this is a problem, right?
For creditors, perhaps, but not for the economy. You see, public sector deficits are generally helpful from a macroeconomic perspective. Providing goods, services and transfer payments without commensurately collecting taxes and fees – while admittedly distressing from a short-term fiscal perspective – does not diminish overall demand but promotes it, which is desirable when mired in an economic soft patch the likes of this past year.
Moreover, it’s important to recognize that as recently as 1999, state and local governments were running sizeable surpluses, intelligently filling up their “rainy day” funds when it made perfect sense to do so. In fact, that year’s surplus of $44 billion was almost as large a share of GDP as is the current deficit. Finally, our state and local governments have a pretty good record of getting things back on track, if only because of balanced budget requirements in their respective charters and constitutions.
Our federal government’s discipline, by comparison, can’t even begin to measure up. But that’s a subject for another time.
