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US Fed warns on local budget cuts

WASHINGTON, August 2 – Federal Reserve President Ben Bernanke warned Monday that cuts in state government spending are slowing the US economic recovery, as he urged politicians to better manage funds in good times.

Facing plummeting tax revenues and bound by rules demanding a balanced budget, local governments across the United States have slashed spending and cut staff.

In California, Governor Arnold Schwarzenegger has declared a fiscal state of emergency and ordered most state employees to take three days of unpaid leave per month in a bid to save money.

"Many states and localities continue to face difficulties in maintaining essential services and have significantly cut their programs and work forces," Bernanke said in a speech in South Carolina.

"These cuts have imposed hardships in local jurisdictions around the country and are also part of the reason for the sluggishness of the national recovery."

Bernanke said the US economy continues to grow at a "moderate pace" after the worst recession in a generation, although a weak housing sector and other pillars of the economy continue to be moribund.

"We have a considerable way to go to achieve a full recovery in our economy, and many Americans are still grappling with unemployment, foreclosure, and lost savings."

That spells prolonged difficulties for local governments, he warned.

"With economic conditions still far from normal, state budgets will probably remain under substantial pressure for a while, leaving governors and legislatures a difficult juggling act as they try to maintain essential services while meeting their budgetary obligations."

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He urged local governments, where possible, to save money when the recovery is established and surpluses return.

"I do not advocate changing the balanced-budget rules followed by 49 of the 50 states; they provide important discipline and are a key reason that states have not built up long-term debt burdens comparable to those of many national governments.

"However, as is the case today, these rules may force significant state cutbacks in bad economic times when services are most needed.

"Building a rainy-day fund during good times may not be politically popular, but it can pay off during the bad times."

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