California's budget surplus is a hidden gem for the US economy. The one-time basket case expects to end the coming 2013-2014 fiscal year with a $1.1 billion surplus. And, the Golden State isn't the only one climbing out of a deep hole dug by recession. Though it's unclear what individual states will do with their newfound riches, recovery means they're no longer a drag on the national economy.
It was only four years ago that California, grappling with a $26 billion budget deficit, had to issue IOUs. Investors and presidential hopefuls like Newt Gingrich openly fretted about the possibility of federal bailouts for hard-hit states. But a combination of tax increases, brutal spending cuts and a little bit of growth has helped such states turn things around.
The 50 US states actually took in 1.3 per cent more revenue in the 2012 fiscal year than at the pre-crisis peak, according to the Nelson A Rockefeller Institute of Government. Connecticut, which is also projecting a budget surplus, hoovered up 10.5 percent more in taxes than in 2008. Other measures, such as cash and equivalents as a percentage of payables, are also improving.
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So there's no guarantee surpluses will be spent on, say, infrastructure or teachers. The nation's economy, though, should benefit simply from improved local balance sheets ending the need for more belt-tightening.
From the end of 2008 through 2011, for example, state and local government cutbacks subtracted, on average, nearly one-quarter of a percentage point from the US economy every quarter, according to the U.S. Treasury. That may not seem like a lot.
But stronger fiscal balances at the local level combined with the fading affects of federal drags like spending cuts mandated by the sequestration could mean the age of austerity is coming to an end. If that's the case, the US economy may have a shot at reaching escape velocity.
