A look at “austerity budgeting” during downturns. Washington has enjoyed strong growth since Great Recession

Balancing government’s books during recessions is a challenge. As we’ve seen with trillion-dollar federal pandemic relief packages, Congress doesn’t worry about that too much. But state and local governments, lacking the authority to deficit spend, must take a more disciplined approach.

The Washington Research Council has examined how states performed during and following the last recession. Their analysis provides useful perspective on the effects of what some have called austerity budgeting. Here’s the set-up.

Speaker [Laurie] Jinkins [said] that her first year in the Legislature was 2011, when budgets were still being cut in response to the Great Recession: “I experienced austerity budgets. And actually Republicans may say what they say but the actual research says that using an all cuts budget for the Great Recession actually hurt Washington’s recovery.”

Austerity budgets are those that reduce government deficits using spending cuts, tax increases, or both. Washington’s Great Recession response was not all cuts—it also included tax increases, fund transfers, reserves, and federal funds.

WRC senior analyst Emily Makings examined the assertion. She reviews some research at the national level–we recommend reading the post–and then writes,

The closest thing to an economic study that I’ve found on the question of how Washington’s budget cuts affected the state economy is this piecefrom the Center for American Progress in 2012. It simply split the states into two groups: states that cut public spending (including Washington) and states that expanded public spending since the start of the Great Recession. Then it looked at median unemployment rates, private sector job growth, and real GDP growth for each group. It found that the median spending cut state had a higher unemployment rate, fewer private sector jobs, and slower economic growth than the median spending expansion state. From this, it concluded that states “that cut spending have fared worse economically than those that expanded spending.”

Makings notes that the exercise says nothing about Washington’s performance, nor does it examine other factors that might have influenced states’ recoveries. (We’d also add that the Center for American Progress promotes an aggressive and  progressive policy agenda. Austerity is not part of their program.

We develop new policy ideas, challenge the media to cover the issues that truly matter, and shape the national debate. With policy teams in major issue areas, CAP can think creatively at the cross-section of traditional boundaries to develop ideas for policymakers that lead to real change. By employing an extensive communications and outreach effort that we adapt to a rapidly changing media landscape, we move our ideas aggressively in the national policy debate.

What’s particularly helpful in understanding Washington’s recovery is the use Makings makes of the CAP analysis. We quote extensively.

The charts below show changes in real GDP, private sector employment, and unemployment rates (like similar charts in the Center for American Progress analysis). I’ve used the same state groupings as the Center for American Progress, but I’ve also shown Washington separately and added data through 2019. As you can see, Washington’s real GDP has grown more since 2007 than either group of states (both through 2011 and through 2019). Washington’s private sector employment didn’t perform as well as the spending expansion states through 2012, but since then it has outperformed either group. Washington’s unemployment rate did increase by more than the median state in the spending expansion group.

The crux:

Altogether, these data points do not show that Washington’s budgetary response to the Great Recession hurt Washington’s recovery, nor do they show that all-cuts responses in general hurt recoveries. Perhaps Washington’s growth would have been even stronger if a different approach had been taken, but the fact is that we have seen significant growth in GDP and private sector employment. From 2007 to 2019, Washington’s real GDP grew 45.0 percent—the second highest growth in the country. Washington’s growth in private sector employment over the same period grew by 18.4 percent—the sixth highest. Further, this growth yielded extraordinary revenue growth for the state in 2013–15, 2015–17, and 2017–19.

In sum, Washington’s measured approach to budgeting during the Great Recession had no demonstrable negative effects on the recovery and may have helped nurture the state’s extraordinary post-recession economic vitality.

Makings concludes,

With the September revenue forecast and the October collections report, the state’s budget shortfall is narrowing. If this trend continues, the question of whether to increase taxes or substantially cut spending may be moot.

Let it be so.