Next Recession Will Pose Challenges for Local Governments

With several analysts warning that a recession could hit the nation in 2020, state and local government finance officials should be mindful of how their budgets will be affected by federal fiscal conditions. Specifically, a large federal budget deficit, coupled with historically low interest rates, could present challenges to local coffers in the event of a recession.

The federal budget deficit is rapidly growing, projected to exceed $800 billion at the close of the current fiscal year. This is due in large part to the recent tax cuts in conjunction with spending increases. Accruing such a big deficit now during a period of growth calls into question how able the federal government will be able to assist the states if and when the next recession strikes. During the last recession, which started in 2008, the federal government assisted the states by pouring money towards expenditures such as infrastructure and Medicaid. In the event of another recession, however, experts are uncertain as to how able the federal government will be able to assist in a budgetary sense, and also how willing from a political standpoint.

Another potential challenge to softening the blow in a recession is the fact that interest rates are currently at historically low levels. During past recessions, the Federal Reserve has been able to help the recovery efforts through monetary policy. Specifically, the Fed usually reduces interest rates by 5 to 6 percentage points. That would not be an option if a recession were to occur in the near future, as short-term interest rates are already down at about 2 percent.

It’s not all doom and gloom, however. First, while many observers are wary of an upcoming recession, not everybody is in agreement that one is imminent. Also, a growing deficit and national debt do not necessarily mean that the federal government will be unable to provide spending to help ease the burden on states in a recession. Nonetheless, the uncertainty serves as a good reminder to state and local governments that sound fiscal policy and planning is always important.

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