Economist says Alaska could feel affect of reduced federal spending

Margaret Bauman

Jul. 27, 2008 (McClatchy-Tribune Regional News delivered by Newstex) -- A University of Alaska Anchorage economics professor estimates that the state could be vulnerable to federal spending cuts of $450 million to $1.25 billion, which could cost the economy 7,000 to 20,000 jobs in the future.

Still Scott Goldsmith said it is impossible to predict with any precision how federal spending will actually change.

Federal spending in Alaska more than doubled between 1995 and 2005, and in 2006 it was $9.25 billion. At present federal spending in Alaska has stopped growing and many Alaskans are worried that the economy is vulnerable to spending cuts as the federal budget tightens, he said in a report released July 18.

"The best we can do is estimate the likely magnitude of reductions, given federal budget problems," Goldsmith wrote in his analysis for the UAA Institute of Social and Economic Research. "Any cuts will likely be made gradually, over time, and recent strength in the petroleum and mining sectors will help cushion the effects," Goldsmith wrote. "Also keep in mind that even if spending is reduced, the federal government will still be a major contributor to the economy."

Goldsmith said that about one third of the jobs and personal income in Alaska can be traced, directly and indirectly, to all types of federal spending. The $9.25 billion in federal spending in Alaska in 2006 consisted of more than $3 billion for defense and $6.25 billion for activities not related to defense, he said.

The non-defense spending was divided among federal agencies. They spent $1.26 billion on wages and procurement (construction of new facilities, plus supplies and equipment) grants to state and local governments, as well as nonprofit groups and tribal governments, totaling $3.08 billion, and transfers -payments to individuals and others under programs like Social Security and federal retirement -- of $1.91 billion.

In 2006, per capita federal spending in Alaska was $13,805, the highest in the nation, and 71 percent above the national average of $8,058. That compares with an Alaska differential of 38 percent a decade earlier -- and which was a level also consistent with at least the decade before that, Goldsmith said.

"If Alaska were to immediately fall back to the 1996 differential, federal spending in 2006 would have been $1.25 billion or 14 percent, less than it actually was. Such a drop could cause a 5 percent decline in the economy. That may not sound like much, but it represents about 20,000 jobs," he said.

A cut that big would be unlikely to occur in a single year, Goldsmith said. More likely, program cuts would be spaced out over several years and be offset by normal growth in other programs driven by formulas, he said.

Goldsmith also looked at state vulnerability to federal spending by the main categories of spending, including transfers for programs like social security and federal retirement benefits, military spending, grants and federal civilian spending.

The future of military spending in Alaska, including wages and procurement, is the most difficult to predict, he said. If the total federal defense budget were to fall, it would pull down military spending in Alaska, even if the Alaska differential remained at its current level, he said. "Right now it appears unlikely that the federal military budge will be cut significantly in the future, but military spending in Alaska is unlikely to increase from its current plateau, and is more likely to fall as money for construction of new facilities continues to dry up," he said.

Margaret Bauman can be reached at margie.bauman@alaskajournal.com">margie.bauman@alaskajournal.com.

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