THE CENTER FOR ECONOMIC and Policy Research has issued a report indicating that the negative impact of state government budget cuts and tax increases are larger than was anticipated when the economic recovery act was passed, and that as a result the massive spending bill won’t have as large an effect as once thought.
The recession has hit state and local governments hard, and a majority of them are now facing budget deficits. Virtually all of these governments are required to balance their budgets, owing to the popularity of such amendments to state constitutions and city charters over the past 30 years. As a result, they will need to either reduce spending or raise taxes, and the CEPR projects they will use stimulus money to offset these shortfalls.
Any money spent to cover a shortfall will only maintain the status quo and not have a stimulating effect. If state and local governments rely primarily on spending cuts instead of tax increases, the negative effect will be larger.
