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That's a smaller gap than states faced in the past two years. But this time, governors won't have federal stimulus funds to help close the deficits. And state governments, in turn, are reducing the aid they send to local governments. "We suspect that these cutbacks are going to deepen over the next couple of quarters," said Mark Muro, a senior fellow at the Brookings Institution. "It's likely we're only beginning to see the state and local drag." In Florida, newly elected Republican Gov. Rick Scott wants to reduce the state's budget 5 percent. To get there, he wants to slash 8,600 state jobs and reduce Medicaid costs through a 5 percent cut in fees paid to hospitals and nursing homes, but not doctors. Health-insurance cuts are popular with many Republican governors. Pennsylvania Gov. Tom Corbett, facing a projected $4 billion-plus deficit, said he can't find the cash to extend a program that subsidizes health care for 41,000 lower-income adults and is nearly out of money. Arizona Gov. Jan Brewer is suggesting that the state drop Medicaid coverage for 250,000 low-income people to make up about half of the state's projected shortfall of about $1 billion. It's not just Republicans demanding tough fiscal medicine. In New York, Gov. Cuomo has said up to 9,800 state employees could be laid off if public-employee unions don't agree to millions of dollars in concessions. The newly elected Democrat has also proposed $1 billion in cuts to New York's Medicaid program, with its 4.7 million recipients. He also wants to close some prisons, freeze wages for nearly 200,000 state workers, cut $1.5 billion in aid to public schools and chop 10 percent from the state's operating budget.
In California, Brown has imposed a state hiring freeze and is proposing cuts to a host of social programs that serve the poor, elderly and disabled. He is also seeking more than $12 billion in tax extensions and fees. The state is grappling with a $26.6 billion fiscal crisis. State spending represents just a fraction of the nation's economic activity. Consumers typically spend roughly six times more than state and local governments do. So a big increase in consumer spending can offset public-sector cuts. U.S. consumers boosted spending at a 4.1 percent annual rate in the final quarter of 2010 year; state and local governments cut spending at a 2.4 percent pace. If consumers had spent just 0.4 percentage point more, they would have offset the state and local government cutbacks. That said, layoffs hurt consumer spending. And states and local governments are cutting their payrolls. State and local governments have cut more than 400,000 jobs in the past two years. Budget pressures will force an average of 20,000 more job cuts each month for the rest of this year, estimates Jon Shure of the Center on Budget and Policy Priorities, a left-leaning think tank. State tax revenue has begun to grow again after falling sharply in recent years. But many governors are now proposing tax cuts as a way to encourage business activity, Shure said. That's likely to escalate pressure for spending cuts because most states must balance their budgets each year.
[Associated
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