Local Government Deficits Could Inhibit Recovery

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N.Y. Times News Service WASHINGTON _ States and mun- icipalities across the country plan to raise taxes and cut spending by tens of billions of dollars in the fiscal year that begins July 1, and economists fear that the money this takes out of consumers' pockets could inhibit recovery from the recession. Edward M. Gramlich, a professor of economics at the University of Michigan who is studying the situation for the Congressional Budget Office, has con- cluded that belt-tightening by state and local governments could send unemploy- ment up one-half of one percentage point nationwide and much more in New York, California and New England, where fiscal problems are the worst. "This will make it more difficult to pull out of a recession this summer," Gramlich said. By some calculations, the tax& increases and budget cuts by state and local governments could total $50 billion in the next fiscal year. The economic effect would be the same as that of a comparable cut in the federal budget deficit. And the political difficulties in& achieving deficit reductions of this magnitude could be as great as they were when President Bush and Congress struggled for months last year to reduce the federal deficit by almost $50 billion. The prevailing, although by no means unanimous, view among economists is that the recession that began last July will bottom out in the late spring or summer and that the economy will return to a path of slow growth. The econom- ists expect that to happen even though for the first time since World War II, the federal government is not stimulating the economy. David D. Hale, chief economist at Kemper Financial Services in Chicago, predicted that the steps the states were taking to eliminate their budget deficits would result in "quite a significant economic drag" and would "reinforce the recession" in many states. Hale, a native Vermonter, is an adviser to Gov. Richard A. Snelling of Vermknt and pays close attention to state budget issues. Few states have completed their budgets for the next fiscal year, so the amount of tax increases and spending reductions cannot be calculated pre- cisely. But the National Conference of State Legislatures, the foremost author- ity on the subject, estimates that 21 states must deal with a total projected budget deficit of more than $35 billion in the next fiscal year. That figure represents a two-year deficit for a few states that operate under biennial budgets. Unlike the federal government, states by law cannot operate in the red. While some states may disguise part of their deficits with accounting gimmicks, almost all the $35 billion will have to be eliminated by raising taxes or cutting spending. Ronald K. Snell, fiscal program director of the Conference of State Legislatures, expects the states to enact about $15 billion worth of higher taxes and to eliminate the rest of the deficits by spending reductions. Hal Hovey, publisher of an authorita- tive newsletter called State Budget and Tax Notes, estimates that more than 60 percent of Americans will be hit with a state tax increase in this calendar year. No one has tallied what is happening at the local level. But cities, counties and school districts across the country are having to cut back. Gramlich and Hale said they would not be surprised if state and local tax increases and budget cuts beginning July 1 totaled $50 billion, about 1 percent of the country's gross national product. …