State and local budget cuts are slowing US economy

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By MICHAEL SANDLER and JEANNINE AVERSA
The Associated Press
Friday, February 25, 2011; 7:09 PM

WASHINGTON -- Deep spending cuts by state and local governments pose a growing threat to an economy that is already grappling with high unemployment, depressed home prices and the surging cost of oil.

Lawmakers at state capitols and city halls are slashing jobs and programs, arguing that some pain now is better than a lot more later. But the cuts are coming at a price - weaker growth at the national level.

The clearest sign to date was a report Friday on U.S. gross domestic product for the final three months of 2010. The government lowered its growth estimate, pointing to larger-than-expected cuts by state and local governments. The report suggested that worsening state budget problems could hold back the recovery by putting more people out of work and reducing consumer spending.

Across the country, governors and lawmakers are proposing broad cutbacks - lowering fees paid to nursing homes in Florida, reducing health insurance subsidies for lower-income Pennsylvanians, closing prisons in New York state and scaling back programs for elderly and disabled Californians.

"The massive financial problems at the state and local levels have and will continue to restrain growth," said economist Joel Naroff of Naroff Economic Advisors.

State and local governments account for 91 percent of all government spending on primary education, according to the Brookings Institution. And they provide 71 percent of higher-education spending. States also account for more than 70 percent of spending on roads, bridges and other infrastructure.

But those same governments cut spending at a 2.4 percent rate at the end of last year. And economists predict they will slash their budgets by up to 2.5 percent this year - potentially the sharpest reduction since 1943. The deepest cuts are expected to occur in the first six months of this year.

The worst cuts so far- 3.8 percent - came in the January-to-March period of 2010. That was the sharpest quarterly drop since late 1983, when the U.S. economy was recovering from a severe recession. Most economists think the cutbacks this year will exert an even bigger economic drag than last year.

Newly elected Republican governors are leading the charge. They're acting on campaign pledges to shrink government to meet budget gaps. They favor smaller governments with lower taxes and less regulation, which they say will boost private-sector growth and job creation.

Some Democrats - including Govs. Andrew Cuomo of New York and Jerry Brown of California - have followed suit. They're pushing for cuts to social programs and concessions from unions.

The governors' push for painful cuts comes just as they gather in Washington this weekend for their winter meeting.

"We have to balance our budgets. We have to address costs. And we also have to move forward at the same time," Maryland Gov. Martin O'Malley, head of the Democratic Governors Association, said after his group met with President Barack Obama and Vice President Joe Biden at the White House.


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© 2011 The Associated Press

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