The Budget in a Broad Economic Context
The State and City budgets are about 10 percent of their gross products (i.e., their total economic activity), so at first glance it appears that only about $1 in $10 goes to the government (see Chart 1):
Source: NYC Comptroller's Office, based on: (1) For Gross State Product, U.S. Department of Commerce, Bureau of Economic Analysis; (2) for Gross City Product, NYC Comptroller's estimates reported in Economic Notes, (3) for NYS budget, Governor's Executive Budget FY 1996, (4) for NYC budget, the City of New York FY 1996 Executive Budget (April 1995). Gross-product data are converted to current dollars.
But some planned State budget cuts (and Federal cuts, not shown) will affect City residents independently of a loss of the intergovernmental aid that is already reflected in the City's budget, so that the combined impact of cuts from all levels of government is likely to be more than the City's budget cuts alone.
Source: NYC Comptroller's Office, based on: (1) for NYS budget, Governor's Executive Budget FY 1996, February 1995, (2) for NYC budget, the City of New York FY 1996 Executive Budget (April 1995).
The challenge facing the City is especially severe for six reasons:
Even without estimating the indirect effects of the cuts, the economic loss from the proposed budget cuts is much higher than $3.1 billion.
To close the $5 billion State budget gap, the Governor has proposed an FY 1996 budget with reductions in State spending of $4.1 billion, through cost containment, agency restructuring and cuts and a freeze in aid to local governments. The Governor's Executive Budget includes reductions to mandated entitlement spending for social-services programs of $1.9 billion. Because of mandated matching requirements by local governments for most forms of social-services spending, the City projects that social-service program reductions included in the Governor's Budget will help close its FY 1996 budget gap by $700 million.
The combined impact on City funds from these entitlement reductions from the Governor's and Mayor's proposals requiring State action is $2.5 billion (see Table 1, Subtotal 1).
Mayor's FY 1996 Executive Budget Cuts and Contingent Aid Losses
|City Funds to Be|
|Total Govt. Funds|
Lost to City,* $mil.
|Share of Total Funds
|Foster-Care Block Grant**||76||219||7.9|
The net loss to City spending is estimated at $2.8 billion when losses from other program cuts, and State and Federal matching funds, are included (see bottom line of Table 1).
Budget Cuts and The Economy
Although the City is one of the richest in the world, with a gross product per capita in 1994 of $40,000, it has more than its share of dependents -- it has one of the lowest employment rates among the nation's cities. The employment rate measures what proportion of all residents (whether employable or not) are working; the remainder are dependent on those who are working. The City's employment rate reached a low of 50.6 percent in 1994, compared to 62.5 percent nationally.
In other words, for every City resident who is working, another is not. In the United States as a whole, by contrast, for every three people who are working, two are not. The difference is not accounted for by the age composition of the City, because the proportion of elderly in the City is only slightly higher than the national average, while the proportion of children (under 18) is substantially below the national average.
The point is that the proposed City program reductions are serious enough on their face, but are much more serious given the time frame within which they are being imposed and given the fact that they are directed at services for poor dependents.
In mid-1989, the City entered a long and protracted recession as economic slowdowns in the rest of the world further exacerbated the impact on the City's economy that had been weakened by the stock market crash of 1987 and the onset of the national recession in 1989. The dramatic decline in economic activity, combined with an increased demand for City services, produced both a shortfall in tax revenues (an unanticipated decline in the rate of growth of revenues and in 1994 an actual decline in revenues) and a rise in the number of people requesting government services. These developments exerted tremendous pressures on the City's budget, resulting in widening gaps between revenues and expenditures.
To deal with these budgetary problems, the State and City sent negative signals to business executives by instituting half-hearted programs to curtail the rate of growth of spending and by increasing taxes. The City's recession lingered for years after the national economy turned up, and the City lost more than 300,000 jobs between 1989 and 1994.
Those in Albany and City Hall who are proposing deep budget cuts in FY 1996 are correct that the budget laxity in the State and City in the first half of this decade contributed to the City's poor economic performance. But the current radical entitlement reductions have their own set of problems. The budget-cutters want to change the behavior of recipients of government aid, but evidence suggests that behavioral changes require alternatives and time.