IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/5533.html
   My bibliography  Save this paper

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

Author

Listed:
  • Henning Bohn
  • Robert P. Inman

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.

Suggested Citation

  • Henning Bohn & Robert P. Inman, 1996. "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States," NBER Working Papers 5533, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5533
    Note: PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w5533.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    2. Douglas Holtz-Eakin, 1988. "The Line Item Veto and Public Sector Budgets: Evidence from the States," NBER Working Papers 2531, National Bureau of Economic Research, Inc.
    3. Sam Peltzman, 1992. "Voters as Fiscal Conservatives," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 327-361.
    4. Buchanan, James M., 1995. "Clarifying Confusion About the Balanced Budget Amendment," National Tax Journal, National Tax Association;National Tax Journal, vol. 48(3), pages 347-355, September.
    5. Bohn, Henning, 1992. "Budget deficits and government accounting," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 37(1), pages 1-83, December.
    6. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    7. Alan J. Auerbach, 1994. "The US Fiscal Problem: Where We Are, How We Got Here, and Where We're Going," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 141-186, National Bureau of Economic Research, Inc.
    8. Alesina, Alberto & Carliner, Geoffrey (ed.), 1991. "Politics and Economics in the Eighties," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226012810, September.
    9. Inman, Robert P., 1982. "Public employee pensions and the local labor budget," Journal of Public Economics, Elsevier, vol. 19(1), pages 49-71, October.
    10. Rivlin, Alice M, 1987. "Economics and the Political Process," American Economic Review, American Economic Association, vol. 77(1), pages 1-10, March.
    11. Poterba, James M., 1995. "Balanced Budget Rules and Fiscal Policy: Evidence From the States," National Tax Journal, National Tax Association;National Tax Journal, vol. 48(3), pages 329-336, September.
    12. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1046-1059, November.
    13. Holtz-Eakin, Douglas, 1988. "The line item veto and public sector budgets : Evidence from the states," Journal of Public Economics, Elsevier, vol. 36(3), pages 269-292, August.
    14. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    15. Poterba, James M., 1995. "Balanced Budget Rules and Fiscal Policy: Evidence From the States," National Tax Journal, National Tax Association, vol. 48(3), pages 329-36, September.
    16. Bohn, Henning, 1992. "Budget deficits and government accounting : Reply to Allan Drazen," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 37(1), pages 93-95, December.
    17. Metcalf, Gilbert E, 1990. "Arbitrage and the Savings Behavior of State Governments," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 390-396, August.
    18. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
    19. Tamim Bayoumi & Barry Eichengreen, 1995. "Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 32-48, March.
    20. Edward M. Gramlich, 1978. "State and Local Budgets the Day after It Rained: Why Is the Surplus So High?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 191-216.
    21. Robert P. Inman, 1995. "Do you know how much money is in your public purse?," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 19-30.
    22. Mathew D. McCubbins, 1991. "Party Governance and U.S. Budget Deficits: Divided Government and Fiscal Stalemate," NBER Chapters, in: Politics and Economics in the Eighties, pages 83-122, National Bureau of Economic Research, Inc.
    23. Buchanan, James M., 1995. "Clarifying Confusion About the Balanced Budget Amendment," National Tax Journal, National Tax Association, vol. 48(3), pages 347-55, September.
    24. Christ, Carl F, 1979. "On Fiscal and Monetary Policies and the Government Budget Restraint," American Economic Review, American Economic Association, vol. 69(4), pages 526-538, September.
    25. von Hagen, Jurgen, 1991. "A note on the empirical effectiveness of formal fiscal restraints," Journal of Public Economics, Elsevier, vol. 44(2), pages 199-210, March.
    26. Inman, Robert P & Fitts, Michael A, 1990. "Political Institutions and Fiscal Policy: Evidence from the U.S. Historical Record," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(0), pages 79-132.
    27. Edward M. Gramlich, 1991. "The 1991 State and Local Fiscal Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 249-288.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Azzimonti, Marina & Battaglini, Marco & Coate, Stephen, 2016. "The costs and benefits of balanced budget rules: Lessons from a political economy model of fiscal policy," Journal of Public Economics, Elsevier, vol. 136(C), pages 45-61.
    2. Feld, Lars P & Kirchgassner, Gebhard, 2001. "Does Direct Democracy Reduce Public Debt? Evidence from Swiss Municipalities," Public Choice, Springer, vol. 109(3-4), pages 347-370, December.
    3. Marco Battaglini, 2009. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," 2009 Meeting Papers 131, Society for Economic Dynamics.
    4. Gebhard Kirchgassner, 2002. "The effects of fiscal institutions on public finance: a survey of the empirical evidence," Chapters, in: Stanley L. Winer & Hirofumi Shibata (ed.), Political Economy and Public Finance, chapter 9, Edward Elgar Publishing.
    5. Milesi-Ferretti, Gian Maria, 2004. "Good, bad or ugly? On the effects of fiscal rules with creative accounting," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 377-394, January.
    6. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    7. Jonathan Millar, 1997. "The Effects of Budget Rules on Fiscal Performance and Macroeconomic Stabilization," Staff Working Papers 97-15, Bank of Canada.
    8. Heiko T. Burret & Lars P. Feld, 2014. "A Note on Budget Rules and Fiscal Federalism," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(01), pages 03-11, April.
    9. repec:ces:ifodic:v:12:y:2014:i:1:p:19108838 is not listed on IDEAS
    10. Francesc Pujol, 2009. "Measuring US Presidents’ Political Commitment for Fiscal Discipline Between 1920 and 2008," Studies in Public Choice, in: Louis M. Imbeau (ed.), Do They Walk Like They Talk?, chapter 0, pages 83-107, Springer.
    11. Lars P. Feld & Gebhard Kirchgassner, 1999. "Public Debt and Budgetary Procedures: Top Down or Bottom Up? Some Evidence from Swiss Municipalities," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 151-180, National Bureau of Economic Research, Inc.
    12. James M. Poterba, 1996. "Do Budget Rules Work?," NBER Working Papers 5550, National Bureau of Economic Research, Inc.
    13. Poterba, James M., 1995. "Capital budgets, borrowing rules, and state capital spending," Journal of Public Economics, Elsevier, vol. 56(2), pages 165-187, February.
    14. Dashkeev, Vladimir V & Turnovsky, Stephen J, 2018. "Balanced-budget rules and risk-sharing in a fiscal union," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 277-298.
    15. Javier Salinas, 1998. "The Constitutional Political Economy of Public Deficits: The Spanish Case 1," Constitutional Political Economy, Springer, vol. 9(3), pages 235-249, September.
    16. Étienne Farvaque & Martial Foucault & Marcelin Joanis, 2015. "L’endettement public des provinces canadiennes : Les règles d’équilibre budgétaire sont-elles efficaces?," CIRANO Working Papers 2015s-10, CIRANO.
    17. Farvaque, Étienne & Foucault, Martial & Joanis, Marcelin, 2012. "Les règles budgétaires dans les provinces canadiennes : nomenclatures et éléments d’analyse," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(3), pages 281-315, Septembre.
    18. Salvatore Vassallo, 1998. "Le basi politico-istituzionali del rigore finanziario," Stato e mercato, Società editrice il Mulino, issue 3, pages 433-468.
    19. Alberto F. Alesina & Roberto Perotti, 1999. "Budget Deficits and Budget Institutions," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 13-36, National Bureau of Economic Research, Inc.
    20. Christian Bjørnskov & Niklas Potrafke, 2012. "Political Ideology and Economic Freedom Across Canadian Provinces," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 38(2), pages 143-166.
    21. Marco Battaglini & Stephen Coate, 2008. "A Dynamic Theory of Public Spending, Taxation, and Debt," American Economic Review, American Economic Association, vol. 98(1), pages 201-236, March.

    More about this item

    JEL classification:

    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:5533. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.