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Toward a Theory of Fiscal Slack

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  • Evgenia Gorina
  • Craig Maher
  • Sungho Park

Abstract

Though the fiscal slack literature has advanced over the past decade, more research is needed for a systematic understanding of the determinants and uses of fiscal reserves at the local level. This paper reviews theory and empirical evidence on the determinants of municipal fiscal reserves offers a conceptual framework for analyzing fiscal reserves accumulation and tests a series of hypotheses using a panel of 2007–2012 financial data for 145 U.S. cities from 21 states. Generalized least squares models show that unassigned general fund balances and unrestricted net assets are positively associated with general fund surpluses in the previous year and with local household incomes, while not being related to measures of fiscal risk, revenue effort, and voter characteristics. Overall, the findings suggest a relatively stronger influence of the capacity to save than the need to save on local fiscal reserves.

Suggested Citation

  • Evgenia Gorina & Craig Maher & Sungho Park, 2019. "Toward a Theory of Fiscal Slack," Public Budgeting & Finance, Wiley Blackwell, vol. 39(4), pages 48-74, December.
    • Handle: RePEc:bla:pbudge:v:39:y:2019:i:4:p:48-74
    DOI: 10.1111/pbaf.12240
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    Cited by:

    1. Gezani Mazibuko, 2021. "Local Government: Getting the South African Municipal Finances Right," Information Management and Business Review, AMH International, vol. 12(4), pages 1-11.

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