October 15, 2002
DID STATES OVERSPEND DURING THE 1990s?
By Elizabeth C. McNichol and Kevin Carey
PDF of this report Additional related reports If you cannot access the files trough the links, right-click on the underlined text, click "Save Link As," download to your directory, and open the document in Adobe Acrobat Reader
The 1990s was a time of tremendous economic growth in the United States. As a result, state governments enjoyed the best fiscal conditions they have encountered in decades. State revenues grew above expectations at the same time that spending pressures declined for many of the safety net programs that are the responsibility of state governments.
Some have argued that states responded to these good economic times by overspending. Critics of state government actions sometimes cite the unadjusted total growth in state spending of 90 percent between 1989 and 1999 as evidence that state spending exploded during this period. A few suggest that the current state fiscal crisis is the result of this overspending. The evidence does not support these claims.
- State spending growth during the 1990s was consistent with and slightly below historical trends. State own-source spending (that is, spending from taxes, fees and other state revenue sources) as a share of personal income increased less in the 1990s than it did in any of the last five decades since 1949.
- Most of the increase in nominal expenditures was due to the natural growth in state government spending that must occur in response to population increases, inflationary increases in costs, and changes in the need for expenditures that result from a growing economy. When adjusted for inflation, changes in population, and the size of the economy, state spending grew only modestly during this period.
- Part of the change in state spending during the 1990s reflected a shift in responsibilities to the state level. Total federal, state and local spending as a percent of GDP declined during the 1990s, but state and local spending increased slightly as devolution moved responsibilities from the federal to the state and local levels.
- The two areas of state budgets that contributed most to increased spending were primary and secondary education and health care.
This report focuses on state spending trends during the 1990s. Examining current data available from sources such as the Census Bureau and the National Association of State Budget Officers the report finds that states did not overspend during the 1990s.
- Most of the increase in state spending during the 1990s was ordinary growth that can be expected when the economy grows. In times when states are not either expanding their role by embarking on major new initiatives or scaling back their responsibilities, state spending can be expected to grow at about the same rate as the economy. If state spending grew at the same rate as the economy, the ratio of total state spending to total personal income a common measure of the size of state economies in total would remain constant. Using this measure, the growth in state spending was not out of the ordinary for recent decades. State own-source spending (that is, spending from taxes, fees and other state revenue sources) as a share of personal income grew from 8.0 percent to 8.4 percent between 1989 and 1999 an increase of only 0.4 percentage points over the decade. This is the lowest level of growth in any of the last five decades since 1949.
- The conclusion that the growth in state spending of the 1990s was not out of the ordinary does not depend on the measure of growth that is used. For example, state own-source spending per person adjusted for inflation increased by an average of 2.0 percent per year between 1989 and 1999. This is below the long-term growth trend of 2.9 percent per year for the entire period from 1949 and 1999. It is also lower than the average annual growth of 2.3 percent in the more recent period between 1969 and 1999.
- Part of the growth in state spending reflects the shift of certain governmental responsibilities from the federal to the state and local levels. While state and local spending grew as a percentage of the Gross Domestic Product between 1989 and 1999, federal spending as a percentage of GDP declined. Overall, the size of government at all levels relative to the economy shrank during the last decade, dropping from 30.2 percent of GDP in 1989 to 28.0 percent of GDP in 1999.
- In addition, certain other governmental responsibilities (in areas such as education) shifted to some extent from the local to the state level as states sought to equalize education spending among localities, contributing further to the increase in state spending.
- State spending increased not only as states assumed a more prominent role in providing government services, but also in response to growing costs and public demands for new investments in certain areas. For example, spending on education grew faster than the economy during the 1990s. Two reasons were that the school-age population grew faster than the general population and that school costs grew faster than general inflation. In addition, states increased their investment in education in response to public pressure for smaller class sizes, more training for teachers, a more equitable system of financing schools, and other costly measures.
- State spending on health care especially Medicaid also grew faster than the economy over this period. The two main reasons were forces outside the control of state policymakers. During the early 1990s, health care costs grew much more rapidly than general inflation. In addition, Medicaid enrollment rose among disabled individuals and the elderly, two groups with expensive health care needs. Some of the increase in costs also resulted from initiatives to expand health care coverage among low-income children and pregnant women and from increases in state spending on hospitals that serve low-income populations.
- State spending on corrections increased as the number of prisoners grew dramatically. This growth was the result of public demands for stiffer penalties for criminals as well as technological advances that improved the ability of law enforcement officials to apprehend criminals.
- Not all parts of state budgets grew relative to the economy. State spending on public assistance declined during the 1990s. Spending on higher education and transportation remained at about the same share of personal income.
In summary, states did not overspend during the 1990s. State spending growth was low by historical standards. States generally increased spending prudently in response to various cost pressures while making limited new investments.
Click here to view full report.