Republicans' Economic Rescue Package Deal May Undermine Economic Recovery, Analyst Warns

Strategic Insights -

Congressional negotiators appear close to a deal on an economic rescue package that excludes federal aid to state and local governments, a move that many see as needlessly cruel. However, the real concern is that state and local cuts will hold back the economic rebound, making the recovery more grueling and miserable. Senate Majority Leader Mitch McConnell is adamant in his opposition to this assistance, which may be a feature rather than a bug in his strategy. The emerging deal, which includes stimulus payments, aid to small businesses, and funding for vaccine distribution, is critical, but state and local aid has been put aside for now.

Key Takeaways:

  • A new analysis from Moody's projects that state and local governments will need to raise taxes or cut spending by between $171 billion and $301 billion over the next year and a half if no federal assistance is forthcoming.
  • Nearly every state will experience significant fiscal stress this year and next, according to Moody's, with "big shortfalls" in state and local funding.
  • A total of 1.3 million public sector workers have already been laid off since the start of the pandemic, leading to the smallest state and local government workforce since 2001, according to Moody's.
  • The only real question is whether budget shortfalls will come from U.S. taxpayers over time or from state and local taxpayers more immediately through tax hikes and austerity measures, with significant economic and fiscal consequences for years to come.
  • Without federal aid, state and local governments will likely implement austerity measures, further harming the recovery, and possibly longer.
  • The failure to get aid in the next few months will constitute a trap that must be avoided, as states will be making budget decisions soon, and the consequences will be felt for many months into the future.

Statistics:

  • $160 billion: the amount of state and local aid that was removed from the emerging deal.
  • 1.3 million: the number of public sector workers laid off since the start of the pandemic.
  • $171 billion - $301 billion: the projected budget shortfalls for state and local governments over the next year and a half if no federal assistance is forthcoming.
  • 2001: the last time the state and local government workforce was as small as it is now.

Sources:

  • Moody's: no date provided.
  • Michael Leachman, Vice President for State Fiscal Policy at the Center on Budget and Policy Priorities: interview by Greg Sargent.