The spending of state and local governments around the country has become less of a drag on the overall economy. The most up-to-date Bureau of Economic Analysis data confirm that real state and local government contributions to growth have been positive in seven of the past eight quarters. As indicated by Moody’s Analytics, the largest source of growth continues to be in the form of social benefit payments to individuals, predominantly Medicaid, which have been rising because of expansions related to the Affordable Care Act. If one controls for these payments, nominal state and local government spending actually declined during all four quarters of 2014.
Lower oil prices have already begun to negatively impact state government finances in Alaska, North Dakota and other oil producing states, but outside of this relatively small group of oil producers, state and local governments benefit from diminished oil prices. Not only do lower oil prices diminish the cost of operating government owned vehicles, but consumers end up spending some of their savings on purchases on taxable goods. State government hiring will continue to be constrained, however, as policymakers allocate additional money to reserves, pensions and Medicaid.
