State Budget Cuts and Fights Over State Fiscal Relief

Additional state fiscal relief is one of the major sticking points in Congressional negotiations over the “phase four” coronavirus relief package: Democrats are trying to tie $150 billion in grants to state and municipal governments and $100 billion for hospitals to a $250 billion expansion of the small business loan program, whereas Republicans only want the latter. A bipartisan group of state governors led by Governors Larry Hogan (R-MD) and Andrew Cuomo (D-NY), respectively the Chair and Vice Chair of the National Governors Association, are now pushing Congress for a larger package of $500 billion in unrestricted fiscal relief for states and territories. Related reading:

State budget cuts were a major headwind blowing against U.S. recovery from the Great Recession—and would have been an even bigger drag without the state fiscal relief provided by the American Recovery and Reinvestment Act of 2009. Adjusted for inflation, state and local government spending cumulatively shrank 9.1% between 2009Q2 (the recession’s technical end) and 2012Q4. Without the drag from these budget cuts, U.S. real GDP growth would have averaged 2.7% annually over this period, instead of growing at the anemic 2.0% annual rate we experienced; the U.S. economy was growing roughly at its trend rate—way too slow to get the economy recovered back to its pre-crisis trend and quickly bring down unemployment. State budget cuts proved the difference between progress toward recovery and treading water, and we regrettably opted for the latter.

Federal grants to states, territories, municipalities, and tribal governments is the most assured way to prevent such a drag exacerbating this recession and impeding eventual recovery. Unlike the federal government, most states are legally prohibited from running budget deficits, so they start axing spending when their tax revenue craters, e.g., because of mass layoffs, furloughs, and closures of non-essential businesses. The economic fallout from the coronavirus is already walloping state budgets and, regrettably, triggering state budget cuts, including cuts to Medicaid programs and hospitals. The Center on Budget and Policy Priorities (CBPP) has a new, timely report out on the rapid deterioration in state budgets:

Emerging projections of state revenue shortfalls, via CBPP:


Related news coverage of state budget cuts continue to pop up left, right, and center:

Congress would be wise to quickly heed the call of Governors Hogan and Cuomo, before state budget cuts begin to seriously impede our public health response to the pandemic and worsen the economic downturn.

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