1. It is an anticipatory 'it' referring to the clause following the colon. 2.
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jooneyQ1) What does it refer to? Does it refer to the content that comes after the colon? (the state makes large cuts...)Yes, if there's nothing obvious it can be in the text that precedes this passage.
jooneyQ2) What kind of meaning does in have here? Does it have a locative meaning, as in the following examples?
ex1)