New York, September 29, 2022 – The majority of US states have the resources to weather an economic recession, according to a new study from Moody’s Analytics. A record 43 states have the cash to weather an economic crisis without having to resort to deep spending cuts or tax increases.
“States have never been better positioned to weather a recession,” said Emily Mandel, the study’s author. “State policymakers appear to have learned a valuable lesson from the Great Recession, a period when tax revenue losses far outstripped savings.”
The Moody’s Analytics study examines how well a state’s finances can sustain it in the event of an economic downturn. Moody’s Analytics economists performed stress tests on all 50 states to arrive at an estimate of each state’s recession needs in the event of a moderate recession. The study takes into account the impact of the economic cycle on government revenue and expenditure over two fiscal years.
Although the stress test results reveal that most states are prepared for a recession, there is some variation in their preparedness, according to the study. A total of 39 states have the funds to significantly reduce the stress of a recession. Four states are expected to raise taxes or cut spending by less than 5% of their budgets. However, seven states are expected to resort to spending cuts or tax increases of more than 5% of their budgets.
States overly reliant on tourism and consumer spending will be hardest hit during a recession, the study found. States whose economy relies on agriculture and energy are better positioned to weather the storm.
The bottom five states with an income gap below 10% are:
• New Hampshire
In contrast, the most cash-rich states are:
• North Dakota
To protect their budgets from increased volatility and fiscal drag, state and local policymakers should consider investing in their budget processes and making stress testing a higher priority. “States may wish to consider formulating targeted reserve levels,” Mandel added. “Planning for a recession requires setting aside enough money today to prepare for a future downturn, without delaying economic growth.”
Read the state stress test study.
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