NEW YORK - Budget shortfalls pose a direct threat to millions of U.S. jobs, many in the private sector, as state and local governments lay off workers and cut spending on contracts and other business services, a think tank said on Thursday.

State and local governments will have to raise taxes and cut spending in the current and next two fiscal years to cover shortfalls totaling $469 billion, according to an Economic Policy Institute report.

The think tank -- where White House adviser Jared Bernstein spent years developing ideas found in the $787 billion economic stimulus plan he oversees -- said the U.S. government must give states and cities $150 billion in direct budget relief to save between 1.1 million and 1.4 million jobs.

Given the fragility of the economy, already high unemployment and the magnitude of the budget shortfalls, it is clear that we cannot afford inaction, the report said, calling the gaps a ticking time bomb for the economy.

While many economists believe the worst recession in decades ended recently, cities' budget deficits are expected to continue at least through 2012.

The low point for cities typically comes 18 months to 24 months after the low point for the recession, said Christopher Hoene, research director for the National League of Cities, at the Brookings Institution in Washington, D.C. on Thursday.

States, too, face future hardship, with the National Governors Association recently saying they are at the beginning of a lost decade of budget struggles.

Those struggles will trickle out to the private sector, EPI said. According to its estimates, for every dollar of budget cuts, more than half the jobs and economic activity lost will be in the private sector.

When asked at the Brookings meeting about the aid their cities need most, four mayors representing both political parties and cities large and small said the federal government must make credit more available to small businesses.

I'm not looking for a sugar high, said Mayor Scott Smith, a Republican from Mesa, Arizona, about direct federal aid that could be withdrawn after a short time. On Main Street the credit market is completely shut off.

If banks were to lend again to small businesses in her town of Bowling Green, Kentucky, then businesses would hire more people, increasing the city's income tax and job fee collection for years, said Democratic Mayor Elaine Walker.


State governments, too, have had to lay off workers, shedding 26,000 jobs from October 2008 to last month, according to the Labor Department.

But nearly one-third of state spending goes to public provisions such as infrastructure, which is usually awarded to private contractors, said EPI, which says it is an independent nonprofit nonpartisan institute that researches the impact of economic trends and policies on workers.

Direct government services, such as fire departments and education, also affect the private sector through supply orders.

Bernstein, speaking at the Brookings meeting, said that without the stimulus plan passed in February, job losses would have been deeper. When indirect spending is taken into consideration -- on things such as equipment for the roads projects in the bill -- the stimulus was responsible for more than 1 million jobs, he said

The plan has already allocated about $144 billion in relief to state and local governments, which has likely saved at least 360,000 jobs, EPI said.

Most of that money has gone to state governments and has yet to reach cities and counties. Cities have only seen direct help through community development block grants to combat blight and police force funding. They also will soon receive grants for energy efficiency.

And while they would like to see credit flowing, the mayors said they also need some direct stimulus.

I have no complaints, other than I can't use a dime for budgetary challenges, said Philadelphia Mayor Michael Nutter, about the stimulus.

On one day we could announce ... in the morning a new grant opportunity from the federal government and later that afternoon announce more layoffs and service cutbacks. The public is confused, he said.

(Reporting by Tom Ryan; Additional reporting by Lisa Lambert in Washington; Editing by James Dalgleish)