WASHINGTON – State and local governments are poised to increase spending this year, adding to the U.S. economic expansion, even as their federal counterpart cuts back.
Outlays by state and local authorities will add about 0.2 percentage point to gross domestic product in 2014, according to a forecast by economists at Morgan Stanley. The federal government will probably contribute nothing to a projected increase of at least 2.6 percent in this year's GDP.
The boost to growth represents a shift from 2010 through 2012, when cuts by states and municipalities reduced U.S. output by 0.3 percentage point each year on average. Those reductions to GDP from local governments were the longest and deepest in the post-World War II era.
"The bulk of the fiscal imbalance at the state and local level is in the rearview mirror," said Ellen Zentner, a Morgan Stanley senior economist.
Unlike the federal government, most states and localities must balance their budgets, which prevents them from running deficits for an extended period and prompts immediate cuts to outlays when the fiscal situation deteriorates.
With the economic expansion in its fifth year, localities are collecting more income and property taxes as the labor market recovers and home prices rise. That has enabled them to start hiring again.
"State and local governments went through the pain, and now they're in a position to start rebuilding again," said Ward McCarthy, chief financial economist at Jefferies LLC.
A $1.01 trillion budget deal crafted by Sen. Patty Murray, D-Wash., and Rep. Paul Ryan, R-Wis., at the end of last year eased the federal spending cuts, known as sequestration, in part by raising user fees.
The deal didn't address long-term deficit reduction. Lawmakers would need to make changes to programs such as Social Security, Medicare and Medicaid that make up almost half of federal spending. Federal budget cuts have been a drag on GDP for 10 of the 12 quarters through September.
Gains in the labor market are one reason behind the improvement at the state and local level as fatter payrolls boost income-tax revenue.
Employers are projected to add 195,000 workers in December, according to economists surveyed by Bloomberg ahead of the Labor Department's report next week. That would put last year's cumulative employment increase at 2.27 million, making it the best year since 2005.
Part of that gain is among state and local governments. Since reaching a more than seven-year low in January, their payrolls have climbed by 87,000 workers to 19.2 million.