The Federal Role in State Fiscal Stress

This article examines the extent to which the federal government'spolicies were responsible for the fiscal stress experiencedby most state governments in the early 1990s. Federal policieshave contributed considerably to recent state fiscal stress,particularly through the Medicaid program—the fastestgrowing part of state budgets—and the recession, whichdepressed revenue and increased welfare and Medicaid spending.Federal aid reductions have not been an important source ofrecent state fiscal stress. The real value of per capita federalaid other than for welfare programs fell considerably in the1980s, but the reductions were much greater for local governmentsthan for states. The largest reductions were in the early 1980s.Federal policies have affected state finances in several otherways—through tax policy, unfunded mandates, and the federalfailure to cope effectively with problems like health and poverty.Federal court rulings have also caused budget problems (as havestate court decisions). In some respects, state fiscal problemsare not a federal responsibility. Rising school enrollments,new corrections policies, and inelastic tax systems have createdfiscal stress for many states. Excessive state spending in the1980s has contributed to recent fiscal problems in some states,but not generally.     

Who Cuts Back and When? The Politics of Delays in Social Expenditure Cutbacks, 1980–2005

This article investigates the politics of delays in social spending cutbacks in OECD democracies. In the context of fiscal austerity, policymakers are assumed to have a strong incentive to manipulate the timing of cutbacks strategically. Applying event history analysis to small and large cutbacks in 21 mature welfare states, the authors test whether partisanship, electioneering and institutional constraints contribute to explain the timing of cutbacks. Macro-economic determinants such as worker productivity, economic growth and unemployment are found to be more important than these political variables. However, left-wing governments and welfare states with more institutional rigidity or a greater degree of contribution financing do tend to delay welfare cutbacks, while cabinets that have recently changed their party composition implement cutbacks earlier.     

Does legislative turnover adversely affect state expenditure policy? Evidence from Indian state elections

The effect of legislative turnover on the size and composition of government expenditures in Indian states over the 1980?C2000 period is examined. The paper finds that excessive turnover in Indian state elections results in inefficient government expenditure policy. First, the higher the turnover, the larger the government size. Second, excessive turnover affects the allocative efficiency of government expenditures by skewing the composition of government spending toward pure consumption and away from more productive investment expenditures. Third, the effect of turnover on fiscal policy is not linear; public consumption expenditure is convex in turnover, while public investment expenditure is concave in turnover.     

Partisan Politics,Globalization, and the Determinants of Privatization Proceeds in Advanced Democracies (1990–2000)

The 1990s have witnessed unprecedented attempts at privatizing state‐owned enterprises in virtually all OECD democracies. This contribution analyzes the extent to which the partisan control of the government can account for the differences in the privatization proceeds raised by EU and OECD countries between 1990 and 2000. It turns out that privatizations are part of a process of economic liberalization in previously highly regulated economies as well as a reaction to the fiscal policy challenges imposed by European integration and the globalization of financial markets. Partisan differences only emerge if economic problems are moderate, while intense economic, particularly fiscal, problems foreclose differing partisan strategies.     

Revenue Cyclicality and Changes in Income and Policy

The past two recessions have proved alarming to state government finances. In 2001, a relatively shallow national recession led to a severe downturn in state revenues that took three years to unwind. In the wake of the recent economic downturn, signs of fiscal stress are readily apparent. In this paper, we investigate whether the revenue patterns surrounding these two recessions are the result of state government revenues having grown more sensitive to economic conditions. We find that the responsiveness of revenues to measures of business cycle conditions has grown since the 1990s. We use data on state government revenues, state‐specific information on economic conditions, and measures of state policy to examine fiscal performance and budgeting practice over the economic cycle. Our findings suggest that increasing income cyclicality, in particular of investment income, has made state revenues more responsive to the business cycle since the mid‐1990s. We also find that changes in policy making have served to increase revenue cyclicality.     

Choosing the path of austerity: how parties and policy coalitions influence welfare state retrenchment in periods of fiscal consolidation

What are the conditions under which some austerity programmes rely on substantial cuts to social spending? More specifically, do the partisan complexion and the type of government condition the extent to which austerity policies imply welfare state retrenchment? This article demonstrates that large budget consolidations tend to be associated with welfare state retrenchment. The findings support a partisan and a politico-institutionalist argument: (i) in periods of fiscal consolidation, welfare state retrenchment tends to be more pronounced under left-wing governments; (ii) since welfare state retrenchment is electorally and politically risky, it also tends to be more pronounced when pursued by a broad pro-reform coalition government. Therefore, the article shows that during budget consolidations implemented by left-wing broad coalition governments, welfare state retrenchment is greatest. Using long-run multipliers from autoregressive distributed lag models on 17 OECD countries during the 1982–2009 period, substantial support is found for these expectations.     

Ausverkauf des „Tafelsilbers“: Bestimmungsfaktoren der Privatisierungserlöse in EU- und OECD-Staaten 1990–2000

The 1990s have witnessed unprecedented attempts at privatising state-owned enterprises in virtually all OECD democracies. This contribution analyzes the differences in the privatisation proceeds raised by EU and OECD countries between 1990 and 2000. It turns out that privatisations are part of a policy of economic liberalisation in previously highly regulated economies as well as a reaction to the fiscal policy challenges imposed by European integration and the globalisation of financial markets. In addition, institutional pluralism exerts significant and negative effects on privatisation proceeds. Partisan differences only emerge if economic problems are moderate, while intense economic, particularly fiscal problems foreclose differing partisan strategies.     

The Impact of State Rainy Day Funds in Easing State Fiscal Crises During the 1990–1991 Recession

This article examines the degree to which rainy day funds eased the fiscal stress experienced by states during the 1990–1991 recession. In the first section, a state fiscal policy of neutrality over the business cycle is used as a benchmark for evaluating the use of budget stabilization funds. The next section looks at data from the last three recessions to see how recessions have affected the taxes and expenditures of states. A measure of degree of fiscal stress experienced by each state during the 1990–1991 recession is then calculated. These results are used to empirically investigate the impact of explicit state rainy day funds in easing state fiscal stress. Next, the article examines whether states that had rainy day funds in 1989 were more likely to have less fiscal stress, and whether the specific deposit and withdrawal provisions of these funds made a difference.     

Fragmented Government Effects on Fiscal Policy: New Evidence

Using a panel of 22 OECD countries over the 1971–1996period, this paper extends previous literature on the effectsof fragmented government on fiscal policy outcomes in variousdirections. First, we focus on data relating to centralgovernment as alltheories refer to central government. Second, we also examinegovernment's position vis-à-vis parliament andgovernment's political fragmentation. We find evidence thatmore fragmented governmentshave higher deficits, while governments that have a largemajority in parliament have lower deficits. Right-winggovernments appear to have been fiscally more responsible inthe seventies. Political fragmentation does not affect agovernment's budget deficit.     

Did globalization restrict partisan politics? An empirical evaluation of social expenditures in a panel of OECD countries

This paper evaluates empirically how, in the course of globalization, partisan politics affected social expenditures in a panel of OECD countries. I introduce an updated indicator of government ideology and investigate its interaction with the KOF index of globalization. Two basic results emerge: First, at times when globalization proceeded at an average pace, partisan politics had no effect on social expenditures, but leftist governments increased social expenditures when globalization was proceeding rapidly. Second, policies differed in the 1980s and 1990s: Leftist governments pursued expansionary policies in the 1980s. Yet partisan politics disappeared in the 1990s, but not because of globalization.     

The impact of globalization on the composition of government expenditures: Evidence from panel data

According to the disciplining hypothesis, globalization restrains governments by inducing increased budgetary pressure. As a consequence, governments may attempt to curtail the welfare state, which is often seen as a drag on international competitiveness, by reducing especially their expenditures on transfers and subsidies. This globalization-induced welfare state retrenchment is potentially mitigated by citizens’ preferences to be compensated for the risks of globalization (“compensation hypothesis”). Employing two different datasets and various measures of globalization, we analyze whether globalization has indeed influenced the composition of government expenditures. For a sample of 60 countries, we examine the development of four broad expenditure categories for the period 1971–2001: capital expenditures, expenditures for goods and services, interest payments, and subsidies and other current transfers. A second dataset provides a much more detailed classification: public expenditures, expenditures for defence, order, economic affairs, environment, housing, health, recreation, education, and social expenditures. However, this second data set is only available since 1990—and only for OECD countries. Our results show that globalization did not influence the composition of government expenditures in a notable way.     

Partisan politics,welfare states,and environmental policy outputs in the OECD countries, 1975–2005

Building on the burgeoning literature on the association between the welfare state and the environmental state, this study empirically examines how the politics of the former has affected the development of the latter. We suggest that the size of the welfare state shapes the calculus of environmental policy costs by partisan governments. A generous welfare state lowers the costs perceived by the left‐wing government, as large redistributive spending allows the government to mitigate the adverse impact of the new environmental policy on its core supporters, industrial workers. A generous welfare state also implies diminished marginal political returns from additional welfare commitment by the left‐wing government, which lowers the opportunity costs of environmental policy expansion. To the contrary, because of lower overall regulatory and taxation pressure, a small welfare state reduces the costs of environmental policy expansion as perceived by a right‐wing government. Our theoretical narrative is supported in a dynamic panel data analysis of environmental policy outputs in 25 Organisation for Economic Co‐operation and Development member states during the period 1975–2005.     

Profligacy Or Prudence? Changes in Employment and Compensation of State and Local Government Workers

As the 1990s began, state and local governments across the country found themselves in a situation of fiscal stress. That stress has been attributed to several sources. Recently, it has been suggested that governments themselves brought on the fiscal squeeze by their own profligacy —a profligacy rooted in excessive increases in employment and compensation of government workers during the 1980s. After summarizing some arguments presented for and against describing state and local practices of the 1980s as profligate, this article compares its evidence on the growth of employment and compensation and notes some different interpretations. The article concludes that a strong statement of the profligacy position has not been proved.     

Australian Federalism: Developments and Prospects

This article discusses the principal recent developments in,and future prospects for, constitutional change, judicial review,fiscal arrangements, local government, public policy, and intergovernmentalrelations since the 1977 Publius issue on Australian federalism,taking into account the arguments presented in the other contributionsto this volume. It highlights the continuing vertical imbalanceof Australian fiscal federalism, and the Hawke Labor government'srecent initiative for a closer working partnership with thestates for reforming intergovernmental arrangements. It arguesthat while there is scope for the latter, there is greater needfor the former. Nevertheless, the 1980s was significant as adecade of predominantly Labor governments working with the federalConstitution, while the 1990s promises to be a decade of celebratingthe centenary of the Australian Constitution and working towardimproving the functioning of its federal system.     

The Effects of Fiscal Decentralization on Public Spending: The Korean Case

The local government reforms of the 1980s and 1990s in Korea involved devolution of substantial resources from the central to local governments. Fiscal realignment between the levels of government occurred during the same period of time. This article places these changes within the context of fiscal decentralization, using a variety of time-series regression techniques, in an effort to assess its impact. Findings suggest that fiscal decentralization serves as a constraint on the behavior of central government, while it serves as a booster on behalf of underdeveloped local governments. Fiscal decentralization may be a very effective means of self-government, and plays a key role in improving the fit between the provision of public goods and citizens' demand in Korea.     

On the link between fiscal decentralization and public debt in OECD countries

Excessive borrowing by subnational governments is considered to be one of the perils of fiscal decentralization. On the other hand, fiscal decentralization might ensure the fiscal stability of the public sector by constraining Leviathan governments. Since the impact of decentralized government on fiscal outcomes is therefore ambiguous from a theoretical perspective, we explore this question empirically with a panel of 17 OECD countries over the 1975–2001 period. Our findings suggest that expenditure decentralization significantly reduces public indebtedness, whereas tax decentralization and vertical fiscal imbalances are insignificant.     

Predicting party identification, 1956–80: Who are the republicans and who are the democrats?

Multivariate predictions of party identification have been based on father's party and social or demographic characteristics in past studies. This paper uses two policy attitudes to predict party along with the usual predictors of partisanship, from 1956 to 1980. The policy attitudes—domestic welfare policy opinion and civil rights policy opinion—have theoretical links to partisanship stemming from the New Deal and the 1960s. Domestic welfare policy opinion is found to be a major predictor of party identification. Despite the inclusion of the two policy attitudes and correction for attenuation caused by measurement error, only about 50% of the variance in party identification can be explained.     

Political and institutional determinants of fiscal policy in the European Community

In recent theoretical and empirical research the variation in political and institutional arrangements which may affect the process of national policy formation is examined, in order to explain cross-country differences with respect to fiscal policies pursued. In this paper we build upon this literature and examine whether and how cross-country differences in debt accumulation and public sector size of Member Countries of the European Community during the 1980s can be explained. We conclude that the growth of government debt is positively related to the frequency of government changes and negatively to sound budgetary procedures. In countries with left-wing governments the growth of the share of government spending in total output generally tends to be higher.     

Conditional Punishment: A Comparative Analysis of the Electoral Consequences of Welfare State Retrenchment in OECD Nations, 1980–2003

Do incumbent parties that retrench the welfare state lose votes during the next election? That is the guiding question for our paper. We analyse elections and social policy reforms in 18 established OECD democracies from 1980 to 2003. We show that there is no strong and systematic punishment for governments which cut back welfare state entitlements. The likelihood of losing votes is the same for governments that retrench the welfare state as for those that do not. Rather, electoral punishment is conditional on whether governments have the chance to stretch retrenchment over a longer period of time, and whether social policy cuts are made an issue in the electoral campaign. If other political parties and the mass media do not put the theme on the agenda of the campaign, and if the retrenchment can be carried out in small steps during a longer governmental term, governments may considerably reduce welfare state effort without fear of major electoral consequences.