State and local governments this year will add to the country’s economic growth, but not at the same pace as they have in the past couple of years, Goldman Sachs said.
Slower growth in tax collections will hold back states and municipalities from boosting their spending. Revenues have rebounded in the past year from a slight decline, but the growth is a meager 2 percent, according to data from state agencies.
“While a small positive contribution [to economic growth] continues to look likely,” Jan Hatzius, head economist at Goldman, said in an April 28 report
, “recent trends imply that the sector will have trouble accelerating from its current modest growth rate.”
The bank cited three reasons that state and local spending will provide a smaller contribution to economic growth in the next year.
1. Slowing Tax Revenue.
The growth in tax receipts may remain subdued in the coming year after rebounding strongly in prior years.
“Since nearly all states have balanced budget requirements, states can generally increase operating budgets by only as much as revenues grow,” Hatzius said.
2. Modest Spending Increases.
Most state governors have proposed fiscal budgets for the next fiscal year, which begins in July for most areas. Those budgets show modest increases in spending, according to Goldman.
“Since many states have yet to finalize their spending plans, it is possible that a revenue surprise could boost outlays more than expected,” Hatzius said, citing California as a state that may be able to boost spending. Goldman estimates spending growth of 3 percent in the next fiscal year, or 1.5 percent after adjusting for inflation.
3. Health Care’s Growing Share.
Spending on health care and other social benefits rose 10 percent in the past year, faster than the 3 percent growth in state and local consumption, according to Goldman’s research.
“A growing share of state and local spending is devoted to health and other social benefits that are included in state spending totals but do not show up as government consumption in the national accounts,” Hatzius said.
A study by the Pew Charitable Trust
found that state tax collections, when adjusted for inflation, hadn’t recovered to pre-recession levels. Lower levels of work force participation reduced the tax base for states in 2014, according to its report.
“About 76 out of every 100 Americans in their prime working years had a job in fiscal 2014, compared with nearly 80 out of every 100 in 2007, before the recession,” the charity said. “The decline in the employment rate translates to lower tax revenue for states and increased expenses for assistance programs for the jobless.”
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