Several U.S. states ill-equipped for a recession : S&P Report

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Several U.S. states  are unprepared to deal with an economic recession by the slow rebound in U.S. economic growth after the damage wrought by the Great Recession, according to studied by S&P Global Ratings

Fiscal imbalances, slower state tax revenue growth and increased spending on social services have contributed to a challenging economic landscape, as real GDP has only increased at 2.1 percent per year since 2009, S&P said in a report issued on Tuesday.

To determine states’ fiscal capacity to withstand the first year of a hypothetical recession, S&P sampled 10 states. The study found that a collective revenue shortfall would eclipse the states’ combined budget reserves by $5.4 billion, the report said.

Real U.S. GDP growth of 2.43 percent in 2014 and 2015 compared to pre-recession rates of 3.79 percent in 2004 and 3.35 percent in 2005, according to data from the World Bank.

Of the 10 states studied, several have budget reserves that equal less than half of “potential revenue under performance” in the first year of a moderate-intensity recession. These include Illinois, Pennsylvania, New Jersey and Connecticut.

Washington, Florida and New York would fare best with reserve balances that exceed potential shortfalls. The remaining states sampled, California, Massachusetts and Wisconsin, fall between those two groups. “Fiscal alignment” is an important indicator of a state’s ability to recapitalize budget reserves, the report said.

Therefore, it’s no coincidence in our view that the four states in our evaluation we found to be most fiscally vulnerable to a recession have also struggled with chronic structural budget imbalance, it said.

States have also raised spending on public welfare such as Medicaid and pension benefits. Spending on entitlements increased to 40 percent in 2013 from 34 percent in 1995 as a share of total state spending. This has reduced the states’ ability to finance infrastructure and higher education pro-growth ventures, it said.

Source : Reuters

 

 

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