It is ironic that this meeting is being held at a time when the news about state finances is very good. Many states have large surpluses. As the federal budget moves into surplus, fears of federal aid cuts have been replaced with hopes of possible new and increased grants to states and local governments. However, a growing number of people feel that this period of economic prosperity is covering or masking a major problem. Structural vs. Cyclical Deficits Worries about the future governmental finance problems fall into two distinct categories.
Cyclical deficits arise out of recessions.
They cause reductions in the rate of revenue growth, perhaps even declines, at the same time that high unemployment drives up the cost of existing safety net programs. Structural deficits, however, arise when government spending and revenue are consistent over long time horizons. They reflect a mismatch between growth in spending needed to maintain current services and growth in revenue from current taxes and other revenue sources. Cyclical fluctuations alternatively obscure and magnify structural imbalances. Because cyclical surpluses can overwhelm the impact of structural deficits, it is quite plausible that current good times in state and local finances are obscuring long-term fiscal problems.