State budget deficits could linger even as U.S. economy strengthens

State budget deficits could linger

State budget deficits will persist and will not be resolved even as the U.S. economic recovery gains momentum. Federal Reserve chairman Ben S. Bernanke said in speech in New York that it will "take some time" for many state and local governments to get their finances in order.

"Governors, mayors and legislators will confront more tough decisions as they develop their budgets for fiscal year 2012," he said.

Without saying specifically how long state budget deficits can be a problem, Bernanke enumerated several reasons.

For one, the unemployment rate is still at 9 percent. Consumer demand is picking up but not quickly enough for businesses to go on a hiring binge. Stimulus money is also drying up. Medicaid demand will also likely to increase further. It jumped 18 percent from December 2007 to June 2010 to over 50 million cases.

Bernanke pointed out that states and local government have frozen wages and laid off many workers. Local payrolls have dropped more than 2 percent during the past two years of the recession, with the education sector being the most affected.

The overall economic growth has been dragged down by the spending cuts made by states in the last quarter of 2010 to 2.8 percent from a more optimistic forecast of 3.2 percent growth rate.

Bernanke said the beleaguered municipal bond market "seems to be functioning reasonably well" under the circumstances. Investors have been wary with municipal bonds since many local governments face mounting pension and health care benefit obligations on top of the widening state budget deficits.

Posted by James Fried on Thursday March 03 2011, 4:35 AM EDT. Ref: AP. All trademarks acknowledged. Filed under Featured News, Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0