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Wednesday, June 30, 2010

States Face Large Budget Shortfall, Problems to Persist

A recent Federal Reserve Bank of San Francisco Economic Letter looked at the fiscal crisis confronting state governments.

According to the Center on Budget and Policy Priorities, state governments faced a combined budget shortfall of $110 billion for fiscal year 2009 and the budget gap increased to $200 billion for fiscal year 2010.

The article points out that fiscal stress at state governments is expected to persist for a long time. Historically, the recovery of state finances lags the national economic recovery. The Center on Budget and Policy Priorities estimates that significant state budget gaps will persist through at least 2012, while the Rockefeller Institute notes that the problem could continue well beyond 2012. Additionally, the depletion of rainy-day funds and the end of federal stimulus funds, which helped the states to narrow their budget gaps, will likely worsen state budget problems.

To address their budgetary gaps, states will cut programs and increase taxes. This will act as a fiscal drag on the U.S. economy, but the impact will likely be modest. “Projected 2010 state budget gaps account for only about 1 percent of national GDP. The combined state budget gaps from 2009 through 2012, as calculated by the Center on Budget and Policy Priorities, total less than the estimated cost of the 2009 federal stimulus package.”

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