Federal grants are the key to helping states balance their budgets as other sources of revenue dwindle, according to a report by the Washington-based Economic Policy Institute (EPI). In her Economic Snapshot for January, EPI researcher Kathryn Edwards uses data from the last recessionary period, 2002 to 2005, to illustrate how it may take years for states to "climb out of the deep fiscal hole" without federal assistance.

After seeing an $80 billion peak of budget shortfalls in 2004, states recovered some in 2006 to 2008, but were projected to see an $89 billion shortfall this year, according to Edwards' report. Such shortfalls usually cause states to either raise taxes or cut public services, such as health care and education. "But cutting expenses and raising taxes only exacerbate the recession's effect because both further reduce demand in the state's already weakened economy," Edwards writes. "That is why federal grants to the states are so crucial: they help states maintain needed public service levels, combat the recession and provide a fighting chance at eventually building up reserves to weather the next downturn."

View EPI's January Economic Snapshot.

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