Changing Red to Black: Deficit Closing Alchemy

John E. Petersen

National Tax Journal, 2003, vol. 56, issue 3, 567-77

Abstract: States and many localities face the direst fiscal situation that they have encountered in the last 60 years or so, with revenues falling or stagnant while expenditure demands continue to grow. This divergence in incomes versus outgoes means that most states face recurring operating fund deficits that must be closed by one means or another. There is a multitude of means to accomplish such closure. The focus here is on the ways in which this can be done other than by actually raising tax rates or reducing spending. Rather, balance is achieved through changes in the balance sheet, in changing the assumptions that underlie the budget, in altering the timing and recognition of various flows, or in redefining what constitutes revenues and expenditures in a budget or, for that matter, the budget itself. Thus, budgets can be given the appearance of balancing. However, temporizing sleights of hand become fewer in number and more expensive to implement when deficits prove to be structural in nature and outflows persistently exceeds inflows. Illusionary budget balancing in the face of structural problems entails long-term costs and compound fiscal stress over time. How one views these results depends very much on one’s political objectives.

Date: 2003
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