State and local governments are reducing services and laying off workers, and unless the federal government steps in with a substantial aid package the cutbacks will drag on U.S. economic growth and cost millions of jobs, according to Moody’s Analytics data reported by The Wall Street Journal Wednesday.
Moody’s estimates that reductions in spending at the state and local level will total about $500 billion during the next two fiscal years, enough to lower GDP by three percentage points. The cutbacks will also reduce employment by about 4 million.
What’s at stake: State and local governments play an important role in the U.S. economy, employing about 13% of all workers. In 2019, they spent and invested about $2.3 trillion, equal to roughly 11% of GDP.
Providing more federal aid to boost state and local budgets makes sense from an economic standpoint, Michael Strain of the conservative American Enterprise Institute told the Journal. “The more state and local employees who are laid off, the higher the unemployment rate goes and the longer it takes to get the economy back to normal,” the economist said.
What’s next: Aid for state and local governments is one of the main sticking points in the now-dormant negotiations over the next coronavirus relief bill. Democrats are seeking $950 billion, while Republicans are offering $150 billion, the same amount provided in the last relief package. House Speaker Nancy Pelosi said Wednesday that the two sides are still “miles apart” in the discussions.