Balanced Budget Rules and Public Deficits: Evidence from the U.S. States

Henning Bohn () and Robert P. Inman

No 5533, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Most states (Vermont is the exception) have a constitutional or statutory limitation restricting their ability to run deficits in the state's general fund. Balanced budget limitations may be either prospective or beginning-of-the-year requirements or retrospective or end-of-the-year requirements. Using budget data from a panel of 47 U.S. states for the period 1970-1991, the analysis finds that states with end-of-the-year (not prospective) balance requirements enforced as constitutional (not statutory) constraints by an independently elected (not politically appointed) state supreme court do have significant positive effects on a state's general fund surplus. The surplus is accumulated through cuts in spending, not through tax increases. It is saved in a state `rainy day' fund in anticipation of future general fund deficits. In contrast, prospective requirements, statutory end-of-the-year requirements, or constitutional end-of-the- year requirements enforced by a politically appointed court do not significantly constrain general fund deficit behavior. Finally, we find little evidence that the constraints `force' deficits into other fiscal accounts.

JEL-codes: H61 H62 (search for similar items in EconPapers)
Date: 1996-04
Note: PE
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Journal Article: Balanced-budget rules and public deficits: evidence from the U.S. states (1996)
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