Under these forecasts, federal aid to states that was designed to be automatic would continue through fiscal year 2025, but would be frontloaded in fiscal years 20, when the unemployment rate-and thus need-is more acute. These forecasts expect the unemployment rate to stay above 6 percent until the last quarter of 2025. In mid-May, the CBO released updated unemployment forecasts for each calendar quarter through 2030. Suppose the federal government were to provide states with fiscal aid for revenue problems only when the unemployment rate exceeds 6 percent, granting $41 billion annually, spaced throughout the year, for every 1 percentage point past this threshold. State governments are supposed to have rainy day funds to smooth spending when revenues drop-at least to a certain extent-so it is reasonable for federal aid to kick in only under extreme circumstances. The revenue shortfalls across all states could reach $41 billion annually for every 1 percentage point increase in the unemployment rate. While previous aid bills have partially addressed pandemic-related spending needs, the primary goal of this new federal aid should be to offset state revenue shortfalls caused by the current recession. While this scale of aid is roughly appropriate to anticipated need over the next several years, a stabilizer would better spread the aid over time and increase or decrease it as necessary. The bill provides $500 billion to states and the District of Columbia. To illustrate, consider one component of the HEROES Act, federal aid to state governments. Up-front outlays can be scaled back somewhat, and, given CBO’s economic forecast, future costs should be only modest. Such an automatic response would help reduce the severity and length of the recession, thus helping stabilize the economy.Īs House Speaker Nancy Pelosi describes the problem, “if you have a stabilizer in it and something… happen next January, it counts in the bill today… The CBO, they count it today.” In other words, the CBO will “score” stabilizers as having a higher cost for the federal budget, which may create political problems.īut properly designed stabilizers need not add dramatic costs. It could have, however, adopted automatic stabilizers, which would increase the fiscal stimulus over time if the economy performs worse, without the need for additional legislation. House of Representatives, the HEROES Act, calls for fixed amounts of aid to constituencies including state and local governments. The $3 trillion pandemic stimulus bill that passed the U.S. Part 3: Target aid so states with higher unemployment rates get more aid per capita Part 2: Aid to states should not disproportionately favor small states. Part 1: Structure aid so it can automatically adjust based on economic need. Note: This is the first in a three-part series on improving the process for allocating federal pandemic aid to where it is needed most.
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