With the Minnesota shutdown put to bed and most states having completed their budget cycles, we can get a look at what state policy will bring us in the next fiscal year. And it’s really not pretty. The Center for Budget and Policy Priorities took a look at this in June, and they found a $103 billion budget gap at the state level, despite increased revenues over much of the country. Most of those gaps were covered with spending cuts and program reductions, as very few governors stuck their necks out for tax increases. One of the few to try, Minnesota’s Mark Dayton, was forced in the end to give up on tax increases, using borrowing and fund shifts instead to close the budget.

Tax increases can have a somewhat negative fiscal impact, although if targeted at the rich it’s less of an issue. But spending cuts typically impact the most vulnerable members of society, and the impact to the macroeconomy is large. $103 billion in cuts over the next year cancels out almost the entire payroll tax cut, which clocks in at $112 billion for 2011. That means that we have anti-stimulus at the state level, and no help from the feds, unlike when the Recovery Act was in force.

This means program cuts throughout government, particularly to health care and education, the largest parts of state budgets. And state workers have taken a whack, even from Democratic governors:

while the most publicized and most agressive anti-union fights have been in states with newly elected Republican governors, unions are being pinched in more traditionally friendly democratic territory as well.

The paths to fiscal austerity chosen by Governors Andrew Cuomo of New York, Dan Malloy of Connecticut, and Martin O’Malley of Maryland have all included a degree of grappling with their public sector unions.

In the past week both New York and Connecticut went through dramatic overhauls of their union contracts and state payrolls. Starting July 12th Governor Malloy began issuing layoffs to state workers as part of his plan to cut upwards of 6,000 jobs and close the state’s $1.6 billion budget deficit […]

Wary of facing similar layoffs, New York state employees are working to negotiate their union contracts in a way that allows their members to keep their jobs but will save the state money in salary and benefits over the next few years. The latest proposed cuts are expected to be painful to the average state worker who makes $40,000 a year,but should save New York from making the same personnel cuts as Connecticut […]

Even in Maryland, Governor Martin O’Malley (Chair of the Democratic Governors Association) had to increase the percent that state workers paid into their pension funds. Claiming on Monday’s Daily Rundown that it “didn’t make a lot of headlines” and “nobody liked it”. O’Malley explained that the difference between Maryland and New Jersey or Wisconsin was that they did not belittle teachers and service employees during negotiations.

This simply gives state workers less take-home pay to spend as consumers, and reduces the overall economy.

Almost all states have balanced budget requirements, and none of them can print their own money. Cutbacks or tax hikes are among their only options during a recession. What is needed is automatic stabilizers for the states, perhaps in the form of a federal fund that can be accessed so that states don’t have to cut back at the worst possible moment, in the middle of a recession. That policy only prolongs the pain and suffering, and a more enlightened policy would include allowing the states to maintain their budgets when times are tough, with federal support.

The good news is that these assaults on state workers is creating a backlash in some states. In Ohio, the citizen veto of SB 5, a ballot initiative that would throw out the state’s anti-union law which restricts collective bargaining, has widespread support in the latest poll.

But crippling state budgets will continue to drag on the overall economy.

UPDATE: Needless to say, failure to raise the debt limit would be even more crippling for states, because they would likely be denied what little state aid remains. CAP has an interactive map detailing the consequences.

David Dayen

David Dayen

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