Effects of budgetary priorities on state fiscal stability during times of boom and bust
Creators: name: Park, Soyoung
Publisher: name: Maryland Shared Open Access Repository
Year: 2015

description: This dissertation examines various budgetary priorities of 50 states in the U.S. in order to determine how the priorities influence fiscal stability during times of boom and bust. The research presented investigates the effects of budgetary priorities on state fiscal stability and state heterogeneity of fiscal approaches across state governments facing different circumstances. Primary research questions include: whether states value fiscal stability, if states respond differently with budgetary priorities during times of boom and bust, and if states have different influence on the stabilization from budgetary priorities, what differences do they have and why. A theoretical framework can help to provide the motivators of budget priorities of the states in the U.S. Based on public choice theory, political economy models, and budgetary stakeholder perspectives, this study explains the financial decision-making and spending propensities of politicians and administrative agencies. State governments are concerned about fiscal instability because they want to maintain economic growth and program continuity. State governments also need to minimize the negative economic and programmatic impacts from economic swings. Fiscal stability indicates whether governments can maintain sufficient levels of funding for their programs during economic downturns. Even with the practical virtue of fiscal stability, state governments do not stick to the normative principle and they behave with fiscal instability. Here, fiscal instability implies pro-cyclicality in fiscal policy (Kwak 2014). Governments increase spending (or cut taxes) during economic booms and cut spending (or raise taxes) during economic downturns. In order to maintain fiscal stability, state governments show different budget behaviors based on differences in circumstances and in political philosophies. They enact various fiscal policies because of different budgetary priorities. Different priorities result in diverse levels of fiscal stability. This research covers the years 1998 through 2013 and uses paneled state data. There have been two economic recessions during the period between 1998 and 2013; however, the strengths and durations of the two economic recessions were different. For example, in 2001, the U.S. economic recession was relatively mild and short. But in 2009, the federal deficit was a huge share of the economy (Auerbach and Gale 2009). Federal deficits increased in the early 2000s, and reached 10 percent of GDP in the aftershock of the peak of the recession (usgovernmentspending.com).Thus, for the purposes of this analysis, the study is compared and divided into two periods, which are one from 1998 to 2005, and the other from 2006 to 2013. In this research, budgetary priorities as motivators for fiscal policies are classified as a perspective of utility maximizer, budgetary stakeholders and service continuity for the purposes of soothing state budgets and helping these governments to maintain and possibly serve political purposes (i.e. concerns about voters). Budgetary priorities are analyzed based on business cycles in both economic boom and bust, because state budgeting should adapt and respond to these cycles (Rubin 2005). There are also the dynamics of state budgetary behavior over the business cycle (Kwak 2014). The impacts of state budgetary priorities on fiscal stability may differ across business cycle booms and busts—“making state fiscal policy asymmetric. State budgets could be more effective at mitigating economic slumps than at muting booms if taxes fall more sharply during a slump than they rise in an expansion of equal magnitude (Sorensen and Yosha 2001, 43-44). In the study, state fiscal stability is measured by using expenditure stability (by type and function), because the expenditure side is controllable by state governments. This is calculated by estimating fiscal stability, which involves calculating the proportional changes in expenditures. In other words, fiscal stability is measured by how far actual expenditure changes deviate from mean changes in expenditures. The heterogeneity of fiscal priorities across states varies depending on institutional, political (divided government, and/or political climate), and economic factors. For example, at the state level, balanced budget requirements may force state governments to engage in pro-cyclical policies involving budget cuts or tax increases in response to a fiscal crisis. In addition, there are pressures from budgetary stakeholders, such as credit rating agencies or interest groups who exert pressure on the states to save money or reduce spending. The budgetary choices of governments are made under constrained conditions. For instance, bond rating agencies expect states to have both reserves and low debt burdens. Moreover, governors in particular care about maintaining the highest AAA level of credit rating. Losing AAA status threatens a governor’s political position in that they might be blamed by state legislatures and run the risk of not being re-elected. Budgetary strategies imply some degree of choice on the part of state governments, but the choices are constrained by the states’ budgetary institutions. Budget institutions cannot be altered recurrently as do the annual government budget. These institutions establish the fiscal restrictions that limit the choices available to state governments (Howard 2009). Thus, the results from diverse priorities lead to different impacts on fiscal stability and shed light on how state governments show fiscal stability with a mixture of budget priorities under specific circumstances.