States Are Eating The Stimulus Money, Not Stimulating With It

In this week’s Thoughts From The Frontline, John Mauldin looks at the prospects of recovery through the prism of what tax receipts look like.  In an interesting aside, he sheds light on the fact that several states, their budgets and finances in disastrous condition, are using federal stimulus money to plug holes rather than fund shovel-ready projects.

This has the potential to be a big story…

Stimulus, What Stimulus?

“Fully nine states are in fiscal distress and only two have balanced budgets. States like Michigan are planning 20% budget cuts for the coming year. Indiana is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How can the economy really be out of recession if government revenues are still deflating?

“The states are filling around 40% of their fiscal gaps with the federal stimulus (so much for spending on “shovel ready” infrastructure projects). Even after the fiscal help from Washington, the state governments will still face a projected deficit of $142 billion for 2011 (versus $113 billion in 2010). All in, the restraint in the state and local government sector is estimated to drain a full percentage point from U.S. GDP growth in 2010 and more than fully offset the stimulative efforts from Washington. The U.S. economy is more likely to post growth of little more than 2% next year, rather than the 5% currently being discounted by the equity market.”

 

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