State and Local Government Budget Cuts a Drag on GDP

July 26, 2012 | Mike Spychalski, CAIA, Vice President

This week’s Chart of the Week shows the contribution to GDP growth in the United States from spending at the state and local government level since 1990. As the chart shows, state and local government spending, which has contributed an average of 0.23% to GDP growth annually over the past 30 years, has declined to a level well below its 30 year average.

The sharp reduction is mainly due to a significant plunge in tax revenues for state and local governments, which is a direct result of the recession that began in December 2007. Since almost all state and local governments are subject to balanced budget requirements, they have had to slash spending in order balance their budgets. As a result of these budget cuts, government spending at the state and local level has detracted an average of 0.20% from GDP growth annually since the first quarter of 2008. Given the drag that state and local government spending has been on overall GDP growth in the United States for the past several years, it is not surprising that growth has been well below trend since the recovery began in the third quarter of 2009.