Poorly-Designed Federal Deficit Reduction Could Threaten States’ Recovery

December 7, 2012 at 2:58 pm

States’ and localities’ ability to deliver public services remains severely diminished, today’s job report shows — and that has serious implications for a potential federal deficit-reduction package.

Over the past few months, state and local employment has leveled out after several years of steep cuts.  States and localities added 4,000 jobs in November but remain 649,000 jobs below the peak in August 2008 (see graph).

This means that states are struggling to provide the same quality of education, health care, and other services to a growing population with more than half a million fewer school teachers, college professors, police officers, and other critical workers than a few years ago.

If federal policymakers adopt a deficit-reduction package that fails to include significant new revenues, federal aid to states and localities will almost certainly fall sharply, seriously harming them just as they are starting to recover.  Federal aid accounts for roughly a quarter of states’ general revenue.

As our recent fact sheet explains, the two main sources of federal aid are Medicaid and the broad category of federal spending known as “non-defense discretionary” programs, which include everything from K-12 education to ensuring clean water to helping low-income renters find affordable housing.   Both are under intense budgetary pressure.

In fact, there’s no reasonable scenario under which policymakers enact major deficit reduction without making big cuts in Medicaid, non-defense discretionary programs, or both — unless the package contains significant new revenue.

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