As if we needed another reminder about the dire straits of the current U.S. economy, the New York Times just published an article which makes an excellent point as to why things are only going to get worse.
What the New York Times points out in their article is that states and cities have yet to contract their budgets, but that is coming. Local governments have a fiscal year which begins July 1, and many of them are planning drastic cut backs to spending.
These local governments account for around $1.8 trillion of the nation’s $14 trillion economy, and their spending accounts for around double that of the Federal government, according to the article. In the past year city and state governments have spent approximately $40 billion above and beyond their budgets, which has aided in keeping the economy above water, but now the consensus is that they are going to have to scale back. Goldman Sachs is predicting that local governments will retract their budgets around $50 billion this year creating a total drop in spending of approximately $90 billion. With this major decrease in spending, and the loss of consumer confidence it is likely to invoke, we might not be able to avoid a recession for much longer.
Certain states will certainly be hit harder than others, with the biggest problems being faced in those areas which are suffering the most from the housing bubble. Local governments draw a large portion of their tax revenue from property taxes, and with property values dropping upwards of 20 percent in some areas, we can expect to see serious budgetary issues.
One of the likely casualties to these budget cutbacks will be schools, according to the article. In my mind this is a shame; considering the state of our school system, this is one of the last areas we should be cutting. Apparently this is the easiest place to make the cuts, though, or at least the one that will create the least problems for elected officials in the immediate term.
We can expect a good number of layoffs as a result of these cutbacks, and consumer confidence will likely shrink further as more people begin to fear for their jobs. By contracting spending, though, people will in essence create a self-fulfilling prophecy by which more businesses are forced to make cutbacks as their profits shrink, and more people lose their jobs as a result. The local government budget cutbacks might just be the straw that breaks the camel’s back, but we’ll have to see how it all plays out.
Who knows, maybe the next president will enact another economic stimulus thereby postponing the inevitable once again. Not only are we piling more and more debt on our nation’s youth, but we are going to cut back on their education as well. So, to sum it up it is not a good time to be a young person in America. Guess I better go up the budget a bit for my daughter’s savings account, as well as create a budget for private school tuition. Looks like we are going to need it…