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Jeffrey Simpson

U.S. states and cities face a painful hollowing out Add to ...

“Hollowing out.” The phrase crept into North American English as a way of describing the loss of manufacturing jobs in industrial cities, especially in the United States.

Now, “hollowing out” might fairly be used to describe the erosion of state and municipal services in the United States. In state after state, and at the municipal level, essential services are being slashed because public finances are so awful.

Since the recession of 2008, 46 states have cut some or all of health care, programs for the elderly and disabled, K-12 education and higher education. Slightly more than 400,000 jobs have been eliminated, and 44 states have reduced wages to state employees through unpaid leaves and other actions.

The cuts will continue in 2011 and 2012. The effect will be to shave perhaps 1 point off GDP growth, thereby slowing down an already halting recovery. That’s bad news for Canada’s own growth prospects, given the link between our economic growth rate and theirs.

The outstanding Center on Budget and Policy Priorities in Washington said in its latest report that states needed to close budget gaps of $110-billion in fiscal 2009, $171-billion in 2010, $160-billion in 2011 and $140-billion in 2012. All states except Vermont have at least a limited obligation to balance their budgets each year. The trouble for the states is that federal stimulus money for them is ending, so that in 2012 almost all of the $140-billion deficit must be made up by state decisions only.

The cuts roll from year to year. This year’s cuts come on top of those made last year, just as the ones next year will follow those made this year.

Only four states with small populations have avoided budget shortfalls – Arkansas, North Dakota, Montana and Alaska. Some of the biggest states’ shortfalls in 2011 were staggering: Illinois (40 per cent), New York (31 per cent), Georgia (25 per cent) California (20 per cent), Florida (25 per cent).

Most states are therefore offering versions of what Illinois has done. There, the government is borrowing heavily, raising cigarette taxes and slashing services for mental health and the disabled, education, universities, reducing pensions and lifting the retirement age for new state employees. The state’s borrowing this year, on top of borrowing last year, will continue into 2012, when Illinois will face an estimated $15-billion deficit.

The latest U.S. housing numbers offer further discouraging news: a continuing high foreclosure rate and little recovery in prices. The knock-on effect for municipal finances is terrible: low property assessments and therefore low property tax revenues.

The contrast between U.S. states and Canadian provinces could not be starker. Here, provinces can legally run deficits. They do so often, thereby postponing future tax increases and spending cuts or, to put matters another way, giving tomorrow’s generation the burden of today’s deficits. Ontario’s Liberal government, for example, is just putting in time, hoping to get through the next election before doing anything serious about the province’s huge deficit.

Seven provinces also receive varying amounts of equalization payments from Ottawa, without which their budgets would look like those of U.S. states. Quebec, for example, gets 11 per cent of its budget from federal transfers. The level in the Maritime provinces is much higher. Even Ontario now receives a small equalization payment.

Canadian provinces also have enormous taxing powers that eclipse those of U.S. states, and populations that are more willing to pay tax than south of the border. Although U.S. states have raised taxes since the recession, many of the increases have been small relative to the severity of the fiscal problem. The political aversion to further increases is intense, especially among the fervently anti-tax Republicans who now control a solid majority of state legislatures.

At the national level, of course, the United States faces $6-trillion of additional deficits in the forthcoming decade, with no sign whatsoever of the political elites or the citizens willing to grapple with the problem.

Outsiders tend to focus on the national problem, where borrowing and printing more money ease the short-term pain. The “hollowing out” of state services is full of pain.

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