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

82 Pages Posted: 5 May 1998 Last revised: 14 Feb 2021

See all articles by Henning Bohn

Henning Bohn

University of California, Santa Barbara; CESifo (Center for Economic Studies and Ifo Institute)

Robert P. Inman

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: April 1996

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

Bohn, Henning and Inman, Robert P., Balanced Budget Rules and Public Deficits: Evidence from the U.S. States (April 1996). NBER Working Paper No. w5533, Available at SSRN: https://ssrn.com/abstract=4069

Henning Bohn

University of California, Santa Barbara ( email )

Department of Economics
Santa Barbara, CA 93106
United States
805-893-4532 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Robert P. Inman (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-8299 (Phone)
215-898-8200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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