Goldman’s Jan Hatzius has warned that spending cutbacks for U.S. state and local governments, due to budget problems for states such as California, will drag down GDP growth this year.
While this already hit the U.S. economy hard last year, 2010 isn’t going to be any better:
What will the effect be over the next year? We believe it will be around ¾ percentage point, i.e. similar to the last year. This is based on the same reasoning as our July 2009 analysis, and it is illustrated in the third column of the table near the beginning of this comment.
Here’s a graph of this drag effect on GDP over time:
As explained in yesterday’s daily comment, we no longer expect Congress to extend FMAP. Hence, there is up to $15 billion or so of budgeted funds that may not materialise. This implies required budget cuts in a range of $89bn-$104bn, or 0.6%-0.7% of GDP, almost precisely the same numbers as we found a year ago for fiscal 2010.
These figures suggest that the state fiscal drag in fiscal 2011 is likely to resemble that seen in fiscal 2010.
So this drag could be just as nasty in 2011 as well.