Economic Needs of New England State and Local Governments in Pandemic Recovery
As part of the GRI Whitepaper Series, GRI has released 10 Special Investigation Reports supported by the Federal Emergency Management Agency (FEMA). These reports bring together analysis and policy recommendations in cross-cutting critical areas including municipal and state budgets, housing, food, healthcare, K-12 education, childcare, higher education, small business, energy, and fisheries. Each sector-specific report was authored by subject matter experts of these areas from GRI’s Northeastern Faculty Affiliates and Massachusetts Institute of Technology’s Lincoln Laboratory, providing an in-depth, accessible review of the challenges, opportunities and actionable policy considerations in each area facing the COVID-19 crisis.
The COVID-19 pandemic has precipitated a contraction of economic activity of unprecedented speed and magnitude. One consequence of the contraction is that state and local governments are experiencing large decreases in revenue inflows and increased need for expenditures associated with public education and social welfare and public health programs. State and local governments are mandated to balance their budgets and will almost certainly implement substantial reductions in their services and programs unless they receive aid from the federal government sufficient to close their pandemic-induced budget gaps. Such a decrease in spending would have two deleterious effects. First, it would inflict harm on residents and businesses that depend on state and local government services and programs. Second, it would produce a substantial fiscal drag on the economic recovery from the pandemic-induced recession. The Federal Reserve has already reduced short-term interest rates to effectively zero and it would be unable to offset that fiscal contraction. As a result, there would be slower economic growth, with less job creation and higher unemployment, than there otherwise would be. A similar, but less severe, problem occurred during the recovery from the Great Recession of 2008. State and local government spending decreased as stimulus funds were exhausted, resulting in a substantial fiscal drag that was an important factor underlying the slow economic recovery during the early 2010s.
This report reviews the impact of the pandemic-driven decline in economic activity in New England on state and local government finances, identifies policy considerations, and discusses some specific policy recommendations.