State Spending Restraint: An Analysis of the Path Not Taken

Scheduled release date: August 11, 2010

Once the recession hit, nearly every state encountered significant a budget gap. Though falling revenue and rising costs were the proximate cause of these shortfalls, the fiscal problems were years in the making. They were the result of decades of unsustainable spending growth.

KEY RESEARCH FINDINGS 

States could have avoided disruptive budget gaps had they kept spending on pace with inflation and population growth. In nine of the ten states with the largest percentage budget gaps, the entire FY2009 gap would have been avoided if inflation-adjusted per capita expenditure had held constant since 1987. If held to 1995 levels, eight of the ten states would have no budget gap.

State and local spending growth has outpaced economic growth. Since 1987, aggregate real state and local spending grew 16 percent faster than the private sector and 90 percent faster than the federal government. In recent years, the difference in growth rates between the public and private sectors has widened. From 2000 to 2009, real state and local spending grew nearly twice as fast as the private sector. (Over the same period, the federal government grew even faster). Because governments rely on the private sector for their revenue, this is an unsustainable trajectory.

States need to reform—but they can’t do it alone. Given the prominent role that Medicaid and other federally-funded programs play in state spending growth, states can’t tame their budgets on their own. Real reform that avoids future crises will require reform on the federal level as well.