Local officials hold breath as federal ‘fiscal cliff’ looms

As Congress returns from its summer recess, it faces looming spending cuts mandated by the Budget Control Act of 2011, a House budget proposal that would cut major programs even more than required by the budget act, and tax cuts that are nearing expiration.

This significant amount of economic uncertainty extends to states and municipalities as they await notification of future funding levels for federal programs administered at the state or local level.

Significant cuts to both non-discretionary and discretionary spending will begin to take effect on Jan. 1 if no alternative to reduce the federal deficit is reached in Congress. The Budget Control Act requires approximately $1.2 trillion in cuts over 10 years.

The cuts as well as the expiration of Bush-era tax cuts at the end of the year, and uncertainty as to whether they will be renewed, have led Federal Reserve Chairman Ben Bernanke to label this confluence of events as a federal “fiscal cliff.”

The Congressional Budget Office, the nonpartisan analytical resource for Congress, recently calculated that Budget Control Act spending cuts, combined with additional tax revenue that would result from the expiration of the Bush-era tax cuts, would amount to a deficit reduction of $607 billion.

Gross domestic product would increase by only one half of 1 percent in 2013, however, with increased unemployment and lower taxable incomes anticipated with the contraction of economic activity. Early indications suggest that the private sector is taking a cautious approach now in both production and hiring as employers wait to see which fiscal policies will arrive with the new year.

The effects of reduced economic activity may be experienced at the local level through an increased demand for social services.

In August, the Washington, D.C.-based Center on Budget and Policy Priorities released a report looking beyond the “fiscal cliff” to the impact of the House budget proposal on states and localities. The center found that under the House budget, states could experience a cut of 22 percent or more in federal discretionary funds for 2014 and subsequent years, beyond the cuts mandated by the Budget Control Act. These cuts would affect areas such as transportation, elementary and secondary education, water treatment, and non-Medicaid health services. In Massachusetts, the cuts could equal approximately $716 million in 2014.

With both a presidential election and congressional elections occurring on Nov. 6, it is unlikely that a long-term policy solution to these critical issues will be considered before the closing days of this congressional session. Prior to recessing for August, congressional leaders reached a tentative resolution to fund government operations through March 2013 at a rate slightly higher than current spending, avoiding the possibility of a government shutdown. This short-term agreement is expected to be considered by Congress upon its return in September.