Title

The economics, law and politics of subnational counter-cyclical fiscal policies: Testing the effects of budget stabilization funds and general fund surpluses on state expenditures in downturn years. Evidence from American states, 1979--1999

Date of Award

5-2002

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Public Administration

Advisor(s)

William D. Duncombe

Keywords

Economics, Law, Politics, Subnational, Fiscal policies, Budget stabilization funds, General fund surpluses, State expenditures, Downturn years

Subject Categories

American Politics | Economic Policy | Policy History, Theory, and Methods | Public Administration

Abstract

Subnational counter-cyclical fiscal policy is a relatively new area of study. This dissertation tests the effects of such policies on state expenditures by examining the economic, legal, and political factors that impact the function of two major policy tools budget stabilization funds (BSF) and general fund surpluses (GFS). The primary research question is: Can BSF and GFS narrow expenditure gaps during economic downturns? This dissertation begins by reviewing the development of BSF, roles of GFS, and conclusions of past literature. By examining BSF enabling legislations, this dissertation provides a strict definition of BSF, with three overarching features. Furthermore, this study defines GFS as the unreserved undesignated balance of the general fund. A panel data set (fifty states, 1979 to 1999, covering the 1980, 1982 and 1991 recessions) was collected from annual financial statements of each state. These distinguish this study from previous ones that use a loose definition of BSF and GFS and the data set from the Fiscal Survey of the States .

The dependent variables are state annual expenditures measured as positive or negative gaps from their trends. Employing econometric models, this study is able to estimate whether, and how much, BSF and GFS minimized negative expenditure gaps in downturn years over the sample period.

The study finds BSF to be an effective counter-cyclical tool--each percentage point increase of BSF can narrow negative gaps of state general expenditure, total own-source expenditure, and general fund expenditure by 0.65, 0.6 and 0.25 percentage points, respectively. However, contrary to assumptions in previous studies, no consistent evidence shows GFS as a counter-cyclical tool. Furthermore, this study finds that BSF were used more to stabilize general expenditure than general fund expenditure, whereas GFS were more often spent on general fund expenditure rather than general expenditure.

This dissertation provides two major policy recommendations to state governments. First, BSF legislation should be created or revised to embrace structural features that contribute to higher BSF balance levels. Second, a longer-term, rather than the annual, perspective on budgeting can better protect states against revenue shocks from economic downturns. The dissertation ends with implications for further research.

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