WASHINGTON — State budget cuts will cause a drop of nearly one percentage point in the gross domestic product in fiscal year 2011 unless the federal government extends its aid to states beyond Dec. 31, 2010, when the American Recovery and Reinvestment Act programs expire, economists and budget analysts warned yesterday.
The federal government should act quickly because, without assurance of continued federal relief, governors and legislatures will start implementing budget cuts and tax increases by this summer at the latest, Mark Zandi, chief economist for Moody’s Economy.com, and analysts at the Center on Budget and Policy Priorities told reporters during a teleconference call.
The budget cuts would lead to the decrease in GDP and result in job losses of roughly 900,000 in fiscal 2011, which begins Oct. 1 of next year, they said.
The center predicted shortfalls in state budgets of $113 billion this fiscal year, which for most states end June. 30, $142 billion the following fiscal year, and $118 billion in fiscal 2012, even after taking into account funds authorized by the ARRA.
The federal government should provide another $20 billion or $30 billion to states in addition to stimulus funding, Zandi said. The funds should be outlayed “quickly, so [states] can forestall cuts they know they’re going to have to make,” he said.
The federal government should put another $100 billion to $150 billion into the economy in calendar year 2010, according to Zandi. That should include $25 billion in aid to state governments, the extension of the first-time homebuyer tax credit, and unemployment assistance, he said.
Then in January or February of 2011, if the job market is still struggling and other economic indicators are grim, federal lawmakers should consider providing even more help, he said.
“Clearly, this is going to be costly. It will temporarily add to the nation’s budget deficit,” Zandi said. But “the cost to taxpayers of not doing more would be even greater. ... The risk’s awfully high.”
States have received help from ARRA through a $53.6 billion state fiscal stabilization fund and an $87 billion temporary increase in federal matching dollars for state Medicaid programs, in addition to other programs authorizing highway grants and Build America Bonds.
State and local governments have slowed their expenditures as well, in areas including education and health care, according to Zandi and the center’s analysts. But because they have been hit with record-breaking drops in tax revenues, state and local governments are still facing deficits this fiscal year amounting to more than 25% of their general fund budgets, the center’s analysts said.
“States are missing one dollar out of every four they need,” said Iris J. Lav, senior adviser at the center. The state fiscal stabilization fund has “helped substantially,” she said, adding that ARRA education and Medicaid funding allowed states to close “30% or 40% of their budget gaps.”
In addition, state fiscal trends lag behind national trends. So even though economists expect the national economy to pick up again next year, states will have budget shortfalls through fiscal year 2012, Zandi said.
Lav added that the lag in fiscal recovery for states will be about two or three years, putting the stimulus programs’ expiration dates in the middle of a state fiscal valley.
“Fifty billion [dollars] would kind of bring states to a reasonable place where they could probably handle the deficits,” Lav said. “But it may not be [politically] possible to do that much.”
Unemployment benefits “clearly need to be extended” because they are “very high bang-for-the-buck items,” said Robert Greenstein, the center’s executive director.
