The legislative response to COVID-19 has been an essential part of supporting Americans and the economy through the crisis. However, states are now navigating how to avoid a budget shortfall (sometimes referred to as a “fiscal cliff”) once federal aid wanes.
At the end of May, the nonpartisan Congressional Budget Office (CBO) released new projections of the nation’s fiscal and economic outlook, their first report since July 2021.
Unlike the federal government, which currently records $30 trillion in debt, most state governments have balanced budget requirements (BBRs) for their operating budgets which only permit borrowing for certain capital projects.
Driven by rising interest rates and the accumulation of federal debt, interest will nearly triple in the next 10 years and reach a historic high relative to the size of the economy by 2032.
While this year’s deficit looks much better primarily due to the expiration of pandemic relief programs, CBO projects that the deficit will soon begin to climb again.
The likelihood of a return to higher interest rates is “both reasonably likely at some point and potentially calamitous for the federal government and broader economy.”