GAO: State, local governments should cut expenditures by 18 percent

[caption id=”attachment_18785” align=”alignnone” width=”1431”] State and Local Simulated Operating Balance Measure, as a Percentage of Gross Domestic Product (GDP) (Source: GAO)[/caption]

The U.S. Government Accountability Office released its 2014 state and local fiscal outlook model that indicates state and local government need to cut current expenditures by 18 percent to achieve fiscal balance over the next 50 years.

The outlook indicates an increase in revenues from income sales taxes from 2009 to 2014, however, a decline of one percent in receipts from the second quarter of 2013 to the second quarter of 2014. Much of the cause for expenditures is related to rising healthcare costs.

Key excerpt from the GAO podcast transcript:

In its simplest form, the state and local fiscal outlook looks at the revenues, or the receipts, coming in to all state and local governments compared to the expenditures going out for these governments. The difference between receipts and expenditures is what we refer to as the operating balance of state and local sector as a whole. In other words, the simple version of the model is to think of a math problem where expenditures are subtracted from receipts, and the difference is the operating balance. The model then simulates the state and local sectors ability to cover expenditures with receipts. One way of using these data to illustrate the long-term outlook for the state and local government sector is through a measure we refer to as the fiscal gap. The fiscal gap is an estimate of the action that would be needed today and then maintained for each year going forward to achieve fiscal balance during the next 50 years from 2014 to 2063. Closing this gap would require state and local governments to make policy changes to assure that receipts are at least equal to expenditures. So, we calculated that closing the fiscal gap would require action to be taken today and then maintained for each year going forward, roughly equivalent to an 18% reduction in state and local government current expenditures. Closing the gap through revenue increases would require action of a similar magnitude through increases in state and local tax revenues. More likely, closing the fiscal gap would require some combination of revenue increases and expenditure reductions.

To compile its projections, GAO uses data from the Board of Governors of the Federal Reserve System, Bureau of Labor Statistics, Census Bureau, Centers for Medicare and Medicaid Services, Congressional Budget Office, Office of Tax Analysis and Social Security Administration.

GAO has published the outlook model since 2007.

Listen

GAO Director of Strategic Issues Michelle Sager discusses the report in an agency podcast (transcript):

http://www.gao.gov/assets/670/667599.mp3

Read the full report (.pdf).