August 1, 2001

NOTE TO EDITORS

Fiscal Policy in New York and New Jersey: 1977-97, the latest issue of the New York Fed’s Second District Highlights, is enclosed for your review.

Real government spending in New York and New Jersey rose more than 40 percent from 1977 to 1997, the last year for which complete data are available. According to Fed economist Andrew Haughwout, sharply higher outlays for public welfare and education fueled the increase in the two states’ public budgets, which grew more rapidly than those of the other states over the same period.

In addition, although the public sector in New York and New Jersey enjoyed annual cash surpluses averaging over $630 per capita during the period, both states saw long-term public debt rise markedly. As a result, net public financial wealth increased only marginally in New Jersey and declined slightly in New York. By this measure, Haughwout notes, the state and local public sector’s overall stimulative effect on the regional economy was relatively small during the period.

According to the author, the two states differed markedly in their approaches to financing increased education expenditures. "In New York, state government took the lead, increasing its education aid to local governments by about $0.72 for every dollar in increased K-12 spending." By contrast, "state government in New Jersey contributed only about $0.25 per dollar of increased spending," relying heavily on local property taxes to cover the remainder. The two states did, however, adopt similar strategies to fund the rise in welfare costs. In both New York and New Jersey, the state government assumed direct responsibility for the increase and cut back the role of local government.

Since the end of the study, the decline in welfare rolls may have relieved some of the pressure on public budgets, particularly at the state level. But increasing demand for education spending and the recent slowdown in overall economic growth may impose fiscal constraints on the states' governments in the future.

Contact: Peter Bakstansky or Steven Malin