Bush Policies Help Bring the Financial Crisis Home

With U.S. banks now partially nationalized, the government is struggling to hold the line, finally linking up in an international network to staunch the hemorrhaging that has been going on in financial markets here, and now around the globe. As the financial crisis spreads out across the world, it is also trickling down to state and local governments, and right up to the doorsteps of most Americans..

This dire picture is rendered even grimmer by the policies of the Bush administration, which has pushed for deep cuts in vital domestic programs amidst this crisis. This will place even more pressure on the states, whose budgets already are badly strained. The downsizing of federal support, combined with the financial crisis, will make it difficult for many states to continue providing basic services to their residents in the coming months and years.

The administration's crusade to cut spending on a wide array of domestic programs is revealed in studies by the usually reliable Center for Budget and Policy Priorities in Washington, an independent think tank that tracks and critiques federal spending with special attention to domestic programs. Under the administration's 2008 budget, the Center reported last year, "domestic discretionary programs—the programs that are funded each year through the annual appropriations process, other than defense and international programs—are slated for sizable reductions over the next five years."

The details of these cuts are largely hidden from public scrutiny, since "the Administration has chosen for each of the past three years not to show in its standard budget materials the funding levels that it is proposing for each discretionary program.... for years after the coming fiscal year." But based on backup documents, the Center calculated some of the cuts:

* Environmental programs would sustain some of the biggest cuts. Funding for pollution control, for example, would be cut by a total of $5.5 billion over the next five years (relative to the expected 2007 funding level adjusted for inflation).

* K-12 and vocational education would be cut by $10 billion over five years.

* The part of the budget that includes community health centers, domestic HIV/AIDS programs, and maternal and child health would be cut by $2.5 billion over five years.

* Funding for hospital and medical care for veterans would be increased next year but cut in each of the four years after that.

These projections are borne out by a 2008 report from the Center, which found that "The President's 2009 budget would provide some $20.5 billion less for domestic discretionary programs outside of homeland security...than the 2008 level, adjusted for inflation."

A large proportion of these cuts come from funding to the states, which provide many of the public services their residents depend upon daily, as well as programs for the poor and the sick, children and the elderly. Yesterday, the Center for Budget and Policy Priorities released a new study showing the depth of the fiscal crisis now facing states. Already, "Most states have been facing budget deficits that have forced, or are now forcing, them to raise taxes, cut spending, or do both to balance their budgets."

Rising joblessness and falling consumer spending are generating less income and sales tax revenues than states expected when they wrote their budgets. Three months into their fiscal year, the budgets of at least 15 states have opened new gaps. Fourteen of the 15 states are among the 29 that already cut spending, used reserves, or raised revenues in order to adopt a balanced budget at the start of the current fiscal year (July 1 in most states). Now, their budgets have fallen out of balance again, raising the likelihood of reduced public services or higher taxes and fees. More states will likely make similar announcements in coming weeks and months.

Now, the credit crisis is adding to the states' financial woes in a new way. The Center reports, "Many states and localities routinely use short-term borrowing to manage their short-term cash flow. State income tax and other kinds of revenue come in more strongly in the second half of most states' fiscal years than in the first. Thus, they borrow to meet their spending obligations when revenues are temporarily insufficient. Indeed, they issue what are called 'tax anticipation notes' or 'revenue anticipation notes' for just this purpose. …states are facing the same problem faced by millions of businesses across the country – tightening credit markets. Lenders are reducing lending, so states are concerned they may not be able to borrow when they need to. That's why California, Massachusetts, and other states may seek to borrow their needed funds from the federal government. The Treasury or Federal Reserve may have to serve as the lender of last resort for them."

All of this adds up to a growing domestic crisis that will be felt in every corner of the country--and felt most keenly by those who are already hurting.