State governments really got whacked by the recession of 2008-2009. Barred by law from deficit spending and facing cuts in federal payments, most states cut programs and services sharply. That situation is now slowly reversing itself.

According to a new report from the state budget officers and governors, total state spending will grow 2.2% in 2013 and general revenue funds will grow 3.4% to $692.8 billion. A report at Reuters notes that primary tax sources are expected to rise by 5.5% and state tax collections are expected to rise by 2.8%.

It’s not exactly tall cotton, though. The executive director of the National Governors Association said:

The direction is encouraging, but it’s still very slow growth. We would despair if it were going down, but we aren’t dancing in the streets because it’s going up modestly. … It would be a disaster for them if the economy went back to recession. They’ve had this experience of just barely climbing out of the hole.

How slow is the growth? Adjusted for inflation, state revenues are down 5.5% below fiscal year 2008 and spending is down 8%. The executive director of the National Association of State Budget Officers put the situation succinctly: “[States] are not going to be able to make up for all their prior cuts, and they’re not going to be able to make up for federal cuts.”

The damage to state governments could be severe if House Republicans and President Obama do not reach a deal on the fiscal cliff. And demands for more spending cuts, even if the cliff is avoided, foreshadow further cuts to federal payments to the states. It is not a pretty picture.

The report, The Fiscal Survey of States, is available here.

Paul Ausick

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