Amy Traub

City Budget Cuts Obstruct Growth

When falling tax revenue and cuts in state aid force cities to slash their budgets, the results are seldom pretty. The services people rely on get decimated (see New York’s senior centers, Boston’s libraries, and Las Vegas’ police department to name a very few). Meanwhile, laid off public employees swell the unemployment rolls.

But curtailing city spending can have more insidious consequences: slowing down national and regional growth. In its latest look at the nation’s prospects for continued recovery, the Economic Policy Institute notes:

“Perhaps most worrying for future growth is that state and local government spending declined for a third straight quarter, and knocked a full 0.5 percentage points off of overall growth in the quarter. The last time state and local spending fell for nine straight months was from the third quarter of 2004 through the first quarter of 2005. This decline is surely in part a function of the extreme fiscal crisis facing states. Given balanced budget rules at the state-level, this implies that states will be cutting spending and/or raising taxes for years to come and hence exerting a powerful drag on growth. Fiscal relief to states from the federal government would be very useful to lessen this drag.”

At a time when critics on the Right have declared a “war on public sector spending” and point to loopholes that allow abuses of the system as a justification for drastic and sweeping budget cuts, it’s worth keeping in mind the critical role city spending plays in the larger economy.

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Posted at 11:40 AM, May 03, 2010 in Economy
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