'Prolonged Recession' Could Be on Horizon as Covid Economic Crisis Leads to State and Local Budget Shortfalls

"We know from the experience of the recovery following the Great Recession just how powerful the economic drag from state and local austerity can be."

by

Eoin Higgins, staff writer

A volunteer signals the number of families in a car who need food from the Second Harvest Food Bank of Central Florida during a drive through food distribution event at City of Destiny church. (Photo: Paul Hennessy/SOPA Images/LightRocket via Getty Images)

With state and local governments are facing fiscal disaster as tax revenues are expected to decline alongside stagnant and lessening economic growth, leading experts on Tuesday warned more financial pain could be on the horizon for working Americans without continued assistance from the federal government or higher taxes on the rich. 

"Time is running short for Congress to act."
—Liz McNichol, Center on Budget and Policy Priorities

"We estimate states alone will see shortfalls of $555 billion in this and the next fiscal year," Center on Budget and Policy Priorities (CBPP) senior fellow Liz McNichol told Common Dreams.

Every state but Vermont is either constitutionally or statutorily required to deliver a balanced budget, making borrowing to make up the difference impossible. That presents further problems with a lack of political will to raise taxes leaving social services cuts the most likely victim of balancing the books. 

"State have to balance their budgets and spending cuts were the first place states looked during the last recession, that means they're going to cut back on education spending and healthcare," explained McNichol. "This will hurt state and local economies and their families and communities."

States in fiscal crisis and cuts to basic services loom as coronavirus ravages local economies https://t.co/pHWFq2ZCbG

— CNBC (@CNBC) July 7, 2020

Reporting from CNBC Tuesday cited data from the Commerce Department as "the latest sign of an unprecedented fiscal crisis gripping virtually every state and threatening basic services including education, healthcare and public safety":

In New York and Nevada, where the coronavirus was raging by March, state Gross Domestic Product plunged 8.2% for the quarter, compared to the national drop of 5%. Other big drops included Michigan at 6.8% and Louisiana at 6.2%. Indeed, no state economy grew during the quarter. The smallest drop was Nebraska at 1.3%.

The consequences of the drops in GDP could be catastrophic, Economic Policy Institute director of research Josh Bivens told Common Dreams. 

"We think that if the federal government fails to address the coming state and local government shortfalls, it will guarantee a prolonged recession and several years of excess unemployment," said Bivens. "We have noted estimates of the state and local shortfalls between now and the end of 2021 hover around $1 trillion, and if we do nothing to close that gap, we'll end 2021 with roughly 5 million fewer jobs in the US economy than we otherwise would have had."

"We know from the experience of the recovery following the Great Recession just how powerful the economic drag from state and local austerity can be," Bivens added, "in that recovery state and local austerity by itself likely prolonged a full recovery of the national unemployment rate by about four years."

Bivens added that the unprecedented nature of the coronavirus crisis and economic fallout make it unlikely that one can even predict the level of disaster facing governments. 

"Estimates of state and local shortfalls are based on historical experiences during recessions," said Bivens. "But the unique nature of the current recession means that these estimates of the help state and local governments will need are probably significantly too low."

States are already cutting back, according to CNBC, with California and New York in particular slashing billions in social spending from their budgets to manage the revenue shortfalls. 

"The unique nature of the current recession means that these estimates of the help state and local governments will need are probably significantly too low."
—Josh Bivens, Economic Policy Institute

But as National Association of State Budget Officers director of State Fiscal Studies Brian Sigritz told the network, federal aid could defray some of the shortfall. 

"If we do see additional federal aid, it could lessen the need for budget cuts in some of these areas, such as public safety, healthcare, education, transportation," said Sigritz. "Also, additional federal aid would help with the overall rebounding of the national economy."

CBPP's McNichol acknowledged that it was also possible that state's raising taxes on richer residents could help to offset GDP losses with the least harmful effect on the economy. 

"People who have benefitted the most from the current economy have savings they can use to pay higher taxes," she said.

Bottom line, said McNichol, state and federal leaders need to take action to ensure social services survive the crunch.

"Time is running short for Congress to act," McNichol said. "States need fiscal relief to address these budget crises."