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State and local governments are spending too much money

Much has been made — for good reason — of the federal government’s fiscal imbalance. High and rising debt (fast approaching $22 trillion), large budget deficits despite a healthy economy and a growing debt-to-GDP ratio should make every American uneasy.

While the situation at the federal level is bleak, the fiscal outlook for state and local governments isn’t much better.

A recent report from the Government Accountability Office (GAO), a nonpartisan government watchdog, reveals that state and local governments are on an unsustainable spending trajectory that will be increasingly difficult to reverse as time passes.

Over the next five decades, the GAO predicts that the negative operating balance of state and local governments — their ability to cover current expenditures with current revenues — will reach 3 to 3.5 percent of gross domestic product (GDP) by 2067. This negative balance stood at just 1.3 percent of GDP in 2017. An increase from 1.3 percent to 3-3.5 percent of GDP may not seem like much, but it represents a substantial amount of money, given that U.S. GDP stands around $19.5 trillion.

What’s driving these trends? Not surprisingly, large projected increases in health care costs (specifically Medicaid) and public pension liabilities make up the bulk of the divergence between revenues and expenditures. From the report:

“Absent any policy changes by state and local governments, revenues are likely to be insufficient to maintain the sector’s capacity to provide services at levels consistent with current policies during the next 50 years. Our simulations suggest that state and local governments will need to make policy changes to avoid fiscal imbalances before then and assure that revenues are at least equal to expenditures.”

The GAO’s warning is cloaked in dispassionate language, but the underlying message is clear. Unless state governments enact substantive reforms to their public health and retirement programs, their fiscal position will only grow more precarious and the risk to taxpayers will deepen. 

Despite these realities and the need for more fiscal discipline, incoming progressive politicians in Maine have shown little interest in reining in out-of-control spending. At a time when policymakers should be scrambling to reverse these trends, the Mills administration’s decision to expand Medicaid to tens of thousands of adult, able-bodied Mainers will exacerbate our widening fiscal gap to the tune of $100 million per year.

There’s little reason to hope that the forthcoming budget proposal will be any more responsible. As a candidate, Mills promised to push for a laundry list of expensive initiatives from universal pre-K to taxpayer subsidies for solar energy. And based on the preliminary list of bill titles released last week, it appears the governor’s allies in the legislature are poised to spend even more than what’s being drawn up in the biennial budget.