WASHINGTON — State and local governments are poised to increase spending this year, adding to the U.S. economic expansion, even as their federal counterpart cuts back.
Outlays by state and local authorities will add about 0.2 percentage point to gross domestic product in 2014, according to a forecast by economists at Morgan Stanley in New York. The federal government will probably contribute nothing to a projected increase of at least 2.6 percent in this year’s GDP.
The boost to growth represents a shift from 2010 through 2012, when cuts by states and municipalities reduced U.S. output by 0.3 percentage point each year on average, according to Commerce Department data. The reductions to GDP from local governments were the longest and deepest in the post-World War II era.
“The bulk of the fiscal imbalance at the state and local level is in the rear-view mirror,” said Ellen Zentner, a New York-based senior economist for Morgan Stanley. “It’s just another example of a headwind for the U.S. economy that’s shifting to a tailwind.”
Unlike the federal government, most states and localities must balance their budgets, which prevents them from running deficits for an extended period and prompts immediate cuts to outlays when the fiscal situation deteriorates.
With the economic expansion in its fifth year, localities are collecting more income and property taxes as the labor market recovers and home prices rise. That has enabled them to start hiring again.
“State and local governments went through the pain, and now they’re in a position to start rebuilding again,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York.
Federal Reserve Chairman Ben Bernanke made the same point in a speech Friday in Philadelphia.
“Throughout much of the recovery, state and local government budgets have been highly contractionary, reflecting their adjustment to sharply declining tax revenues,” he said in remarks to the American Economic Association. Now, “the budgetary situations of state and local governments have improved, reducing the need for further sharp cuts.”
McCarthy contrasted that with the federal government’s budgetary woes.
“The lesson learned here, however, is that if you try to delay the inevitable, things don’t get better, and that’s what’s happening in Washington,” he said.
A $1.01 trillion budget deal crafted by Sen. Patty Murray, D-Wash., and Rep. Paul Ryan, R-Wisc., at the end of last year eases the federal spending cuts, known as sequestration, in part by raising user fees.
The deal didn’t address long-term deficit reduction, in which lawmakers would need to make changes to programs such as Social Security, Medicare and Medicaid that make up almost half of federal spending.
“Congress will still have to continue to reach for the ever-elusive grand bargain,” Zentner said. “Short-term, we’ve been set firmly on the path for improvement at the federal level.”