State and Local Government Spending Should No Longer be a Drag from H2 2013

 1/ State and Local Government Spending have been a drag since Q4 2009

 

After the 2007-09 recession and a wave of federal stimulus funding, governors and mayors were forced to slash spending which had a negative impact on growth. According to the Bureau of Economic Analysis (BEA), since Q4 2009, their spending cuts have subtracted from national output in every quarter with only one exception (Q3 2012).

 

 

2/ Fortunately, a growing economy has led to higher tax revenues and surpluses for most states in fiscal 2013

 

An improving economy has led to more job creation and a rebound in housing prices and transactions which has supported tax revenues. Indeed, according to data compiled by the Rockefeller Institute of Government in Albany, New York, tax revenues for U.S. states grew about 9 percent in the first three month of this year compared to the same period in 2012, the biggest gain in nearly two years.

 

Moreover, a twice-yearly survey of state budgets conducted by the National Governors Association and the National Association of State Budget Officers notes that revenues have come in stronger than expected this fiscal year so that most states will be able to end fiscal 2013 with surpluses. The fiscal years of all states but four end on June 30.

 

The table below shows that in total, states will likely end this fiscal year with balances of $23.7 billion. Florida and Indiana will likely have ending balances of more than $2 billion. Massachusetts, Minnesota, New York, Ohio and Texas are expected to have surpluses greater than $1 billion. Finally, California, which faced strong difficulties during the crisis, should have a surplus of $785 million.

 

 

The survey also underlines that budget gaps should decrease significantly in fiscal 2013 and 2014:

 

“State revenue improvement and spending controls have helped to significantly reduce budget gaps in fiscal 2013. Eighteen states reported closing $33.3 billion in budget gaps in fiscal 2013. This compares with 27 states reporting $68.1 billion in budget gaps in fiscal 2012, and 31 states with $78.2 billion in budget gaps in fiscal 2011. Because of rising revenue collections and decreased spending demands compared to the pre-recession period, budget gaps are expected to decline further in fiscal 2014 with 13 states projecting $6.8 billion in budget gaps.”

 

Finally, the net mid-year budget cuts which is one of the most effective signs of fiscal stress is also expected to fall in fiscal 2013:

 

“One of the clearest signs of fiscal stress is net mid-year budget cuts, as these actions are evidence that states will not be able to meet previously set revenue collection forecasts. Eleven states enacted mid-year budget cuts in fiscal 2013 totaling $1.3 trillion, slightly less than the $1.7 trillion in mid-year budget cuts made in fiscal 2012.”

 

 

3/ It gives more room for officials to increase spending from H2 2013 (beginning of fiscal 2014)

 

As a consequence, the survey shows that officials are more confident to increase spending on infrastructure and education. Total expenditures are expected to increase by 4.1% in fiscal 2014.

 

“Modest state fiscal advancements are widespread with 42 governors recommending higher spending levels in fiscal 2014 compared to fiscal 2013.”

 

“Revised revenues estimates for fiscal 2013 indicate that states are in better fiscal position to increase spending for some program areas in fiscal 2014, particularly K-12 education which experienced significant reduction during the recession.”

 

“In fiscal 2014, general fund expenditures are projected to increase by 4.1%. Governors’ recommended budgets show general fund spending increasing to $728.0 billion in fiscal 2014, compared to $699.2 billion in fiscal 2013.”

 

4/ My view

 

Even if the survey also suggests that some risks remain as the federal government budget cuts or Medicare, the base case scenario is that state and local government spending should not be a drag in fiscal 2014 (starting in Q3 2013) which should support GDP.

 

Yet, I believe that states should be cautious at the beginning of the fiscal 2014 because the debate on debt ceiling should not be addressed by government before the end of Q3 2013. A real boost could take place in Q4 2013.