What would capping federal spending at 20% of GDP mean for states?

October 3, 2012 at 9:54 am

We have posted before about proposals to roll back federal spending to 2008 pre-recession levels, but now there is some analysis of what it would  mean to cap federal spending at 20 percent of GDP. The Economic Policy Institute’s blog has a post explaining that the impact on states would be significant:

…a little over 17 percent of non-interest federal spending flows directly to states (e.g., matching funds for Medicaid and unemployment insurance), and with a half trillion dollars in cumulative shortfalls that states have faced in the last few years and another $55 billion in shortfalls faced this year, states would have difficulty handling another blow to their budgets.

Their analysis finds that across the board, states would see a federal funding loss of at least 9  percent of total state expenditure– which is equivalent to 20 percent of states’ total general fund. The map  below shows how states would be impacted– the darker the color, the bigger the blow.

North Carolina falls among the mid-high range of impact, with a loss of $4.5 million, or 9.3 percent of total state expenditures.

EPI notes that this is a conservative estimate, as it is based on 2009 census data on state government finances, which is the most recent data available. The impact, therefore, would be worse if taking into account the fact that state expenditures have grown over the past few years which means that federal funds would be more today than they were in 2009.

 

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