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Politics : Stockman Scott's Political Debate Porch

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To: Jim Willie CB who wrote (13496)	2/26/2003 4:50:48 AM
From: stockman_scott	Read Replies (1) of 89467

Comstock Funds > State Deficits Offsetting Federal Stimulus Impending state budget deficits could offset a large portion of the proposed federal stimulus package. Although we first wrote about the problem on November 25, 2002 (see ?State Budgets Exerting Negative Drag?), the issue is currently receiving more publicity as a result of this week?s meeting of the National Governors Association. Once all of the states have updated their figures for the current fiscal year ending on July 31, 2003 for most states, the total deficit could come to $50 billion. The figure already equals $40 billion for the states that have calculated their projections on a current basis. Of the deficits, $35 billion is a result of revenue shortfalls and increased Medicaid payments while $5 billion is attributed to homeland security expenses. Next year?s total deficit could run up to $80 billion even assuming relative sanguine mainstream economic forecasts. The shortfall is worse, both in absolute and percentage terms, than the worst deficit of the early 1990s. The $19.5 billion deficit of 1992 amounted to 6.5% of the state budget totals while the current $50 billion projection is close to 10%. The pending federal fiscal stimulus proposal provides no extra funds for the states. In addition the states have still not received the promised federal assistance for homeland security and over half the 40% share of various mandated costs that the federal government promised to pay. Since state governments are required by law to balance their budgets, a gap of perhaps $50 billion this year and $80 billion next year must be closed through a combination of reduced spending and higher taxes. Since many of the states have already used up most of their reserves and rainy-day funds and have made some of the easy moves such as cutting some non-controversial spending and raising so-called sin taxes (tobacco and alcohol), some hard choices are ahead. Looking at the numbers, it is obvious that if the first year of the federal stimulus package is $100 billion, state actions to balance their budgets cut the effect of the federal stimulus in half. If the federal stimulus is less, the impact of the state budgets is even greater. The states? budget problems provide further support to our view that federal fiscal policy will have an exceedingly difficult time overcoming the strong headwinds to growth left over by the structural imbalances created in the late 1990s boom. comstockfunds.com

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