The CBO has released its outlook for the budget for 2008 through 2012. Under an assumption that current laws and policies do not change, CBO projects that the budget deficit will rise to 1.5 percent of gross domestic product (GDP) in 2008 from 1.2 percent in 2007. CBO: The Budget and Economic Outlook: Fiscal Years 2008 to 2018

The Center on Budget and Policy Priorities released an analysis yesterday forecasting that as least 21 states will face budget shortfalls due to reduction in sales tax collections and other tax revenues in the next fiscal year. This isn't good news, as state budgets are far less flexible than the federal budget and usually are legally prohibited from running a deficit. From the report's introduction: The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like. Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend. The vast majority of states cannot simply run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather a significant downturn or recession. The other alternatives — spending cuts and tax increases — can further slow a state's economy during a downturn and contribute to the further slowing of the national economy, as well. CBPP: 14 States Face Total Budget Shortfall of at Least $29 Billion in 2009; 12 Others Expect Budget Problems

In Part 1 of this series on economic stimulus fiscal policy, I defined what fiscal policy is and why policy makers would use it during an economic downturn. Today, I discuss "the multiplier process." The multiplier process is the reason that not all fiscal policies are the same - some are more effective than others at jump-starting a faltering economy. In short, the multiplier effect is the phenomenon by which a dollar injected into the economy (in this case, through fiscal policy) replaces more (and sometimes less) than a dollar of reduced aggregate demand.

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