State Budgets: Struggling to Grow

Source: Christopher Thornberg, State Legislatures, Vol. 39 No. 1, January 2013

To say it has been a rough few years for state and local governments would be an understatement. Although the economy has been modestly expanding since 2009, the public sector in aggregate has continued to run deficits for almost five years. This has never happened in the time since officials began collecting reliable data following World War II….

… Why the ongoing difficulties? There are a number of causes. One is the depth of the downturn that hit the U.S. economy. But more significantly is the weak recovery. The common strategy used by state and local governments when dealing with cyclical budget gaps is often the ‘kick the can down the road’ option—using stopgap measures and temporary cuts. And this isn’t a bad method if revenues come back strongly during the recovery period, as they typically have. Employing temporary and stopgap measures avoids intensifying the strength of a downturn by not adding public spending cuts to an already weak private sector. This time, however, the recovery in state and local revenues has paralleled the overall weak recovery of the economy—implying this same strategy has done little more than push the deficit down the road. Added to this has been a general reluctance to raise taxes (given the potential impact on the weak recovery), and a decline in federal support as the stimulus programs have faded away. Moreover, several states have seen many of their expenditures put on autopilot through voter referendums and public union contracts, limiting lawmakers’ choices greatly…