Alleviating the state-level fiscal crunch is likely to require more federal support, privatising state assets and services, and shrinking public sector employment, according to Oxford Analytica. However, these moves — particularly public-sector redundancies — will set back the pace of recovery. OxAn says in States face severe fiscal crunch.
“Many states face constitutionally mandated deadlines to balance their budgets today, which marks the end of the second quarter. For the 38 states facing fiscal deficits, achieving balanced budgets in the current economic climate is exceptionally difficult, due to steep revenue shortfalls. Since rises in general taxation are often politically untenable and many states have strict borrowing limits, they face deep spending cuts; many public employees will lose their jobs, creating a renewed surge in unemployment and economic distress.”
Aside from implementing new taxes or cutting spending, many states are also implicitly relying on the federal government to bail them out.
The states’ fiscal crisis is very likely to persist until the 2011 fiscal year, requiring further increases in state taxes, spending cuts or federal aid, OxAn says. State budget problems will also generate three key trends:
- Further federal aid. There will be additional money for states if Obama’s fiscal year 2010 budget blueprint emerges from Congress largely intact — including ambitious healthcare reforms, further increases in unemployment insurance (boosting states’ allocations of unemployment benefits) and money to shore up education spending.
- Privatisation of services. States are likely to return to a policy option dormant since the 1980s — the privatisation of state services. This takes two forms: privatising assets (physical or virtual) to raise funds, or subcontracting some public services to the private sector. For example, some states may consider privatising (or further privatising) their prison systems.
- Smaller government. Over time, this is likely to lead to renewed demands to shrink the size of government, restoring the political appeal of traditionally Republican policies. However, this shift is likely to take many years.