Spending beyond inflation and population growth accounts for budget gaps

By Daniel M. Rothschild

It didn’t have to be this way, with states slashing budgets, cutting services, hiking taxes and fees, all while peering into the crevasse of fiscal meltdown.

That’s the conclusion of a new paper by Matthew Mitchell, an economist at the Mercatus Center at George Mason University. In “State Spending Restraint: An Analysis of the Path Not Taken,” Mitchell calculates what state budgets would look like today if legislatures had held per-resident, inflation-adjusted spending to their 1987 or 1995 levels.

And it’s a much different picture than what’s playing out in statehouses across the country.

Mitchell looked at the ten states with the highest budget gaps as a percentage of their last budget in the 2009 and 2010 fiscal years, which includes a total of 14 states. He finds that in twelve of these states, the 2009 budget gap would have disappeared if the states had held spending to 1995 levels, adjusting for population growth and inflation. Only one of the states would still have a budget gap had spending been held to 1987 levels.

“This counterfactual analysis further illustrates that, though revenue has fallen in recent years, the long-run problem is over-spending,” said Mitchell. “Many of the states with the worst budget gaps would be looking at budget surpluses today if they had only kept their spending in check for the last 15 years.”

The problem is not just state policies, Mitchell is quick to point out, but federal policies as well. Medicaid’s share of aggregate state spending more than doubled between 1987 and 2009. Even after controlling for population growth and for the particularly high inflation rate of the medical care sector, real per-capita Medicaid spending grew by nearly 122 percent during this time.

In inflation-adjusted per-person terms, elementary and secondary education and corrections costs have increased, while cash assistance has decreased.

Mitchell urges the federal government to revisit the Medicaid spending model so that it doesn’t encourage states to spend beyond their means on health care. He also suggests that states look at implementing one of a variety of institutional reforms to limit spending: tax and expenditure limitations (TELs), item-reduction vetoes, strict balanced budget requirements, or supermajority requirements to raise taxes.

“There’s no magic bullet to reining in spending,” said Mitchell. “But there are practical institutional reforms that can help.”

Daniel Rothschild is a Visiting Adjunct Scholar with the Pelican Institute for Public Policy and the Managing Director of the Mercatus Center’s State and Local Policy Project at George Mason University.