Wednesday, June 4, 2008

STATE & LOCAL BUDGET CUTS TO ADD TO FINANCIAL WOES

LOUIS UCHITELLE, NY TIMES Struggling as we are with the housing bust, the credit crunch, shrinking consumption, rising unemployment and faltering business investment, we can be forgiven for thinking that all the big shoes have dropped. There is another one up there, however, and it is about to come down.

State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre- crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far, not even in California, despite a significant decline in tax revenue.

"We are looking at a $4 billion cut to public schools and deep cuts that will result in thousands of Californians losing their health care," said Jean Ross, executive director of the California Budget Project, offering a preview of coming hardships. "But the reality is we have not pulled money off the streets yet."

Quite the opposite, the states and municipalities have increased their spending in recent quarters, bolstering the nation's meager economic growth. Over the past year, they have added $40 billion to their outlays, even allowing for scattered spending freezes and a few cutbacks in advance of July 1. Total employment has also risen. But when the current fiscal year ends in 30 days (or in the fall for many municipalities), state and city spending will fall, along with employment - slowly at first and then quite noticeably after the next president takes office.

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