Governor Andrew M. Cuomo today outlined the economic cost of a Federal default on New York, including serious potential damages to the fiscal health of the State that would undermine the economic progress it has made in the last three years. A default would be unprecedented, but data from past recessions suggests that the State's revenue loss could be as high as $2 billion.
"Congressional dysfunction has already hurt New York and the nation's economies by fueling a lack of consumer confidence nationwide. Jeopardizing our full faith and credit is a new level of recklessness and irresponsibility that would have dire consequences and could cause irreparable damage to our economy," said Governor Cuomo.
New York's economy has gained over 300,000 jobs since the start of 2011. In addition, the State has passed three on time budgets with a bi-partisan legislature resulting in New York's credit's outlook being by recently raised to positive by Moody's Investor Services and Standard & Poor's.
Economists believe that a default could trigger a national, if not global, recession. The impact would setback much of the progress New York State has made. This includes a significant negative impact on State revenues and sizable job losses throughout all sectors, most notably private employment because a default has the potential to cause another recession.
A report by the U.S. Treasury Department from this month entitled "The Potential Macroeconomic Effect of Debt Ceiling Brinksmanship" outlines the potential consequences: "In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth--with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression. Considering the experience of countries around that world that have defaulted on their debt, not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation."
During the last recession New York lost 324,000 jobs, state wages fell 7.2% in 2009, the largest annual decline in the history of the Quarterly Census of Employment and Wages report, and taxable capital gains realizations fell 52% in 2008 and 41% in 2009.
Failure to act in Washington would put the national economy at risk, jeopardizing New York's significant recovery and leading to additional fiscal pressures. New York is the epicenter of the financial services industry, which is still recovering from one of the most cataclysmic periods in its history. A default of federal debt would reverse the progress that has been made and impact Wall Street profitability, employee compensation and, as a result, State revenues.
Congressional failure to increase the debt ceiling would also result in the federal government having insufficient funds on hand to meet its current obligations. It is unclear how the federal government would prioritize payments in an emergency cash management situation -- any federal program could potentially be impacted. Vital programs for vulnerable New Yorkers would be at risk, including direct benefits and the programs and providers that support them.
In addition to the loss of State revenues and the impact on federal services, the default of federal debt would ripple through the municipal bond market. According to a report from Moody's Investor Services, public finance issuers would also likely face higher borrowing costs, and market access would be challenging. The State's borrowing costs would increase substantially, potentially with a long term impact of $1 billion over 20 years for debt issued by the State this year. In some scenarios, the municipal bond markets could shut down and New York would lose access to the bond market. This would jeopardize planned capital investments in roads and bridges, higher education facilities, hazardous waste remediation, environmental projects, and economic development projects.