Tags: Goldman Sachs | Municipal | Budget | Cuts | Reduce | GDP

Goldman Sachs: Municipal Budget Cuts May Reduce GDP

Monday, 20 Dec 2010 02:17 PM

Lower state and local spending, which accounts for 12 percent of the national economy, may reduce U.S. gross domestic product growth by about half a percentage point next year, Goldman Sachs Group Inc. said.

Municipal budgets will likely increase by no more than 1 percent in 2011 after adjusting for inflation as local governments receive less state aid and home-price declines put a drag on property-tax collections, the bank said in a note to clients. That is about 2 percentage points less than average.

“State and local governments will continue to face substantial budget pressures for the time being,” wrote Andrew Tilton, a New York-based economist, in the Dec. 17 note. “Factors including, but not limited to, the lagged effect of lower house prices will limit the growth of spending.”

Housing prices have fallen almost 30 percent since their height in April 2006, according to the Case-Shiller 20-city index. States, which will lose most federal stimulus funds next year, are faced with closing $134 billion in budget gaps in fiscal 2012, according to a Dec. 16 report of the Washington- based Center on Budget and Policy Priorities. State tax collections are 12 percent below pre-recession levels, the report said.

Borrowing Costs

Municipal employment, which has fallen by about 2 percent since late 2008 — compared with more than 5 percent in the private sector — is likely to fall “a bit further” before stabilizing in 2011, Goldman Sachs said. Large layoffs may be avoided if localities raise real estate taxes to offset declines in assessed property values, it said.

Municipalities are also likely to face higher borrowing costs because of the potential end of the taxable Build America Bonds program, which offers a 35 percent federal subsidy on interest payments. Expiration of the program may cut the pool of investors as borrowers revert to traditional tax-exempt issues, boosting yields, Goldman Sachs said.

The Build America Bonds program wasn’t part of the $858 billion tax-cut plan the Senate passed last week. John Mica, the Florida Representative who will head the House Transportation and Infrastructure Committee next session, said last week he planned to introduce a “reincarnation” of the program in 2011.

Goldman Sachs researchers boosted their economic growth forecasts for 2011 and 2012 after Congress signed the tax plan. The economy will grow 3.4 percent in 2011 and 3.8 percent in 2012, compared with previous estimates of 2.7 percent and 3.6 percent, the report said.

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Lower state and local spending, which accounts for 12 percent of the national economy, may reduce U.S. gross domestic product growth by about half a percentage point next year, Goldman Sachs Group Inc. said.Municipal budgets will likely increase by no more than 1 percent in...
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2010-17-20
Monday, 20 Dec 2010 02:17 PM
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