In the years preceding the recent recession, direct expenditures by state and local governments rose faster than their own-source revenues. (They compensated for this by receiving more fiscal transfers from the federal government.) The widening structural gap between revenue growth and expenditure growth is causing financial stress. Many states have taken painful measures to balance budgets: cutting wages and benefits and reducing the number of public employees. More cuts are likely to come, which could harm the fledgling economic recovery, raising unemployment and dragging down revenues.
—Prajakta Bhide, research analyst, United States and Global Macroeconomics
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