The economic consequences of state budget cuts

by Ken Jacobs, Laurel Lucia and T. William Lester May 2010

When it comes to jobs and the economy, not all solutions to California’s budget shortfall are equal. Most measures designed to reduce the deficit will have a depressing effect on employment and economic growth in the state, but the magnitude of that impact will vary significantly depending on which measures are enacted.

 In this brief, we estimate the economic impact of Governor Schwarzenegger’s proposed 2010–2011 budget using IMPLAN 3.0, an industry-standard input-out- put modeling software package. We further compare the economic impacts of these cuts with an alternative approach that mixes spending cuts with targeted revenue increases sufficient to avoid cuts in programs that bring in a federal match.

We estimate that the Governor’s proposed budget would result in a loss of 331,000 full-time equivalent jobs, increasing the unemployment rate by 1.8 percentage points.1 More than half of the jobs lost would be in the private sector. Because many of the jobs lost are part time, the actual number of Californians affected would be much greater. The number of jobs estimated to be lost is much greater than the entire employment growth for the state projected by the Legislative Analyst’s Office for 2011.2

An alternative approach that mixed spending cuts with $5.4 billion in targeted revenue increases would save an estimated 244,000 jobs compared with the Governor’s proposal.

Ken Jacobs is the chair of the University of California, Berkeley, Center for Labor Research and Education. Laurel Lucia is a policy analyst at the University of California, Berkeley, Center for Labor Research and Education. T. William Lester is a postdoctoral fellow at the Institute for Research on Labor and Employment at the University of California, Berkeley, and the assistant chair of the Don Vial Center for Employment in the Green Economy at the University of California, Berkeley. The greatest part of the job loss due to the Governor’s budget would result from cuts to major health and human service programs that bring in significant federal matching funds. These cuts would result in the loss of:

261,000 full-time equivalent jobs, increasing the unemployment rate by 1.4 percentage points.

This is fifteen times greater than the number of jobs that would be lost through an

equivalent sized revenue increase. $21 billion in economic output, compared to a loss of $3 billion through an equivalent revenue increase.

$1.3 billion in state and local tax revenue, compared to a loss of $0.2 billion for an equivalent revenue increase. This means that potentially close to one-quarter of the budget savings would be negated due to the loss in economic activity.