Where the State Budget Squeeze Hits

Below is the most distressing slide I saw at this week's National Association for Business Economics Conference, courtesy of the National Association of State Budget Officers:


From fiscal year 2003 through fiscal year 2012, state general fund budgets increased 34 percent, almost exactly in line with population growth and inflation. But that growth wasn't evenly shared across program areas.

Medicaid spending has been driven up by two factors: Health care inflation has outpaced general inflation, and a weak economy has increased the share of the population that is eligible for Medicaid. As Medicaid grew faster than most parts of state government, others had to lag. State general fund spending on higher education, in particular, shrank a great deal in real per capita terms.

So what has been the upshot of that? It has not, mostly, been spending restraint at public colleges and universities. When you look at total spending by state governments, including special funds, higher ed spending is up 32 percent over the same period. That reflects higher tuition collections; as states have been cutting general budget support for higher ed, they have been raising tuition to make up for it.

That brings me to a slide from the most alarming presentation I saw last week, from the Federal Reserve Bank of New York on student loan debt:


Since 2004, as tuition has risen sharply and college attendance has grown modestly, student loan balances outstanding have tripled. And this is one factor driving our slow recovery: Young educated people, laden with debts they would not have had 10 years ago, cannot afford to buy homes or form households.

One of the key fiscal strategies of the last 10 years has been to deal with high college cost inflation and weak tax receipts by shifting education costs away from the government and toward individuals. It's not sustainable, and it's a key reason both health care and education cost control have to be at the top of the policy agenda.

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    Josh Barro

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