GAO: State, local budgets have tough road ahead

{mosads}According to its latest analysis, the GAO projects deficits at the state and local level will only get worse for the foreseeable future under existing policy. Without changes to shore up finances, the GAO projects deficits will continue to grow steadily for decades to come.

To be precise, the GAO estimates that if state and local governments wanted to close the gap between revenues and expenditures, they would have to either cut spending by 12.7 percent or increase taxes by the same amount.

The primary cause for the worsening fiscal picture is the projected growth of healthcare costs. For state and local governments, that means spending on Medicaid, coupled with the cost of providing healthcare to state and local government employees and retirees.

The GAO projects that from 2012 to 2060, healthcare costs will grow from 3.9 percent of the nation’s economy to 7.1 percent. In contrast, other government spending, including paying government employees, is expected to decline in the future as a share of the economy.

The impact of the healthcare reform law will be mixed for state and local governments, according to GAO. For example, states that offer less Medicaid coverage now could see their costs climb as the law as implemented — although other portions of the law could reduce costs elsewhere.

Similarly, the impact of the budget deal struck to avert the summer’s debt-limit fight could be a mixed bag at the state and local level. The GAO said it is still “unclear” exactly how they will be affected by the automatic cuts set to take effect in the new year.