Expenditure Smoothing under Balanced Budget Rules

An increasing number of countries use balanced budget rules (BBRs) to control government debt, with the potential cost that BBRs constrain the governments' ability to smooth public expenditures. We find that U.S. state governments, despite having BBRs, smooth expenditures using savings. This is accomplished via substantial cash balances held by agencies outside of the General Fund with only a minor contribution from dedicated “rainy day†funds. We estimate a state government discount rate using a buffer stock model, fitted to fiscal data consolidated over all agencies, and find that expenditures are smoothed as if guided by a planner with a discount rate similar to that typically found for consumers.