Abstract
This chapter examines the effects of boom-year savings on budgetary actions that states often take during a recession. Here I draw the link between countercyclical fiscal policy and the concept of countercyclical fiscal capacity (CCFC). I define CCFC as the accumulation of savings in boom years and the use of them during revenue shortfalls to maintain countercyclical spending and program stability. Because a basic challenge for state governments is to maintain budgetary stability and program predictability in face of economic downturns, states can best meet this challenge by developing the “countercyclical fiscal capacity.” In this chapter, I operationalize CCFC in terms of fiscal reserves (BSF and GFS) and analyze the operation of such reserves over a period that includes recessions in 1991 and 2001. I find evidence of the efficacy of countercyclical fiscal capacity and argue for states to make greater investments in this aspect of governance capacity.
This chapter draws from data and analysis in Hou Y and Moynihan D (2008) The case for counter-cyclical fiscal capacity. J Public Adm Res Theory 18(1):139–159.
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Notes
- 1.
National Council of State Legislatures, http://www.ncsl.org/programs/legman/statevote/statevote2000.htm
- 2.
In this chapter I use the term GFS rather than GFB, see Section 3.2 for the rationale. GFB figures in the i often include BSF balances. Not excluding BSF from these GFB figures will cause double counting. Specifically, California’s BSF balance is reported to be negative in 1991 (−1,715 millions) and 2002 (−3,535 millions), both much larger than the negative balance of the GFB. In such cases, we turn the BSF into zeros and these larger negative balances to be the revised GFB. For more information, see California Code 16418 (d).
- 3.
The annual balances of BSF and the annual GFS may be serially correlated, even after they are converted into per capita real levels. The Prais-Winsten (1954) model is chosen to correct for the serial correlation.
- 4.
One caveat to keep in mind with this model is that it does not include state-specific recessions, and so changes in the dependent variables, while dependent on cyclical fluctuations, may also arise from other factors.
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Hou, Y. (2013). Effects of Boom-Year Savings on Bust-Year Budgetary Actions. In: State Government Budget Stabilization. Studies in Public Choice, vol 8. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-6061-9_7
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