Effects of COVID-19 on Federal, State, and Local Government Budgets

Abstract

ABSTRACT:This paper examines how the COVID-19 pandemic and the associated policy responses affected federal, state, and local government budgets. The pandemic raised federal deficits temporarily but has had a modest effect on long-term budget projections, in part because of sharply lower projections of interest rates. With low interest rates and the economy in recession, the debt accumulation resulting from the pandemic does not require immediate offsetting policies. For state and local governments, we note the unusual nature of the current recession: the concentration of job losses among low-wage workers; the unprecedented increases and expansions of unemployment insurance benefits and business loans; and strong performance by the stock market. To address these issues, we use a bottom-up approach that accounts for the geographic variation in economic outcomes. Relative to analyses based on the historical relation between revenues and the unemployment rate, we estimate notably smaller revenue losses. We further estimate that federal aid has been large relative to these revenue losses, but not necessarily relative to need—for public health, remedial schooling, services for the elderly, and others—especially if the pandemic persists and especially in certain hard-hit states.