US State Governments' Coffers Are Full... "Mitigating the Impact of Economic Recession"

US State Governments Increase Surplus Funds Including Excess Tax Revenue
Ample Fiscal Capacity for Spending During Economic Downturn

[Asia Economy Reporter Kwon Haeyoung] This year, the surplus funds of U.S. state governments, including excess tax revenues, have reached the highest level in 35 years, and it is analyzed that they could play a significant role in mitigating the impact of the upcoming economic recession. This contrasts with the federal government, whose debt has nearly reached the legal limit, raising concerns about a potential default.

On the 5th (local time), the Wall Street Journal (WSJ), citing the National Association of State Budget Officers (NASBO), reported that this year, state governments' "rainy-day funds" amounted to $136.8 billion (approximately 171 trillion KRW). This is an increase from $134.5 billion (approximately 168 trillion KRW) a year ago. It accounts for 0.53% of the U.S. Gross Domestic Product (GDP), marking the highest level since 1988.

Rainy-day funds refer to surplus tax revenues accumulated during good economic times to prepare for recessions. Generally, when the economy slows down, consumer spending decreases, layoffs occur, and government tax revenues decline. From the government's perspective, funds need to be injected to stimulate the economy. However, U.S. state governments have secured the capacity to increase future fiscal spending by saving surplus tax revenues during prosperous times instead of wasting them. The size of the rainy-day funds of U.S. state governments is reported to be 12.4% of this year’s state government expenditures.

WSJ analyzed, "Cash is overflowing in state governments," and "It is expected to help mitigate the impact if a recession occurs."

Credit rating agency Moody's estimated that if a 'mild' recession occurs, 39 states could already compensate for future tax revenue losses through the surplus tax revenues accumulated in their coffers. Earlier, Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), also mentioned on the 1st that "the federal and state governments are currently vibrant" and "this could support economic growth this year."

Some U.S. local governments have already allocated finances to economic recovery and stimulus programs. New York City invested $8.3 billion (approximately 10 trillion KRW), which is 11.1% of this year’s tax revenues, into such programs?the largest scale ever. Los Angeles (LA) and Chicago also increased their rainy-day fund finances.

As state governments save tax revenues as emergency funds instead of wasting them, it is expected that they will contribute to reducing the shock caused by an economic recession. The spending scale of local governments currently accounts for 11% of total U.S. economic consumption. The wages they pay also represent 13% of the entire market, which is larger than the combined scale of manufacturing, construction, retail, leisure, and services.

Jeffrey Burswick, S&P Global government sector analyst, analyzed, "If state governments use reserves instead of adjusting budgets, most potential losses caused by a shallow recession can be offset by the surplus tax revenues already accumulated."