The aspect that’s most relevant is the state deficit spending, including their capital accounts as well as operating accounts.

From what I’ve read, for this year they will have higher deficits than they will have next year, so that’s a negative for gdp.

If the simply tax less and spend less that means the population has that much more to spend than otherwise, and may or may not spend it, so that channel will reduce spending by the amount of the tax reduction the population doesn’t spend.

And increases in pension fund contributions by the states reduces spending that adds to gdp as well.

Municipal Cuts May Reduce GDP, Goldman Sachs Says

By Simone Baribeau

December 20 (Bloomberg) — 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.

7 Responses

  1. Warren this was reported a couple of weeks ago related to the 2011 state budgets issue:

    “Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011…”

    GOP successfully killed the pro-union “card check” last 2 years with a minority. GOP looks at the AFSCME as a real enemy, and one of the largest source of funds for Dem campaign coffers, may try to take a run at them this way…


  2. Ellen Brown may yet get her State Bank of California (along the lines of North Dakota’s). Apparently back in the 70’s, this was suggested by the then-governor of California, Jerry Brown (gee, I wonder what happened to him?).

    I suppose the sarcasm may be lost on some foreign readers, after a 28 year hiatus, Brown is about to be sworn in as governor again.

    1. Yes, and Governor Moonbeam is just crazy enough to do it. Arnie was too much of a girly man to declare the IOUs good for tax payments, but Browns has shown he’s willing to at least contemplate the “crazy”…

    2. What a fantastic turn of events it would be if CA did in fact start it’s own bank. This might provide a clear example to the rest of the country that a government (or central) bank can fund a deficit without the need for relying on usurers private banks. As CA goes so goes the nation.

  3. Yes, municipal cuts will reduce GDP growth.
    The mathematics of Monetarily Non-Sovereign government finances are straightforward: Inflation requires that over time, such governments have money coming in from outside. Taxes merely recirculate within the government’s territory, and each year that tax money is worth less.
    Such Monetarily Non-Sovereign governments as Greece, Italy, California, Cook County, Chicago et al, can survive if they have a positive balance of trade or if a Monetarily Sovereign entity gives them money. In the case of California, Cook County and Chicago the entity is the U.S. government. In the case of Greece, Italy et al, the entity would be the EU.
    Loans to indebted Monetarily Non-Sovereign governments are like treating drug dependence with drugs. The “patient” may feel good short term, but long term he is in worse condition than ever.
    The federal government should support the states, which in turn, should use part of the money to support the counties and cities. Otherwise yes, the GDP will falter.
    Rodger Malcolm Mitchell

    1. agreed, and on a per capita basis, so it’s ‘fair’ and isn’t a ‘reward for bad behavior’

      (also my second proposal behind the payroll tax holiday and $8/hr fed funded job for anyone willing and able to work)

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