Budget Deficits in the States: Massachusetts

Massachusetts entered the current recession carrying a structural deficit counterbalanced by a healthy, $2.1 billion stabilization fund, equal to 10 percent of total tax revenue. Like most states, Massachusetts only dimly realized the depth of the current recession in October 2008 when revenue collections began to slip and welfare caseloads began to increase. By May of 2009, a total FY2009 budget gap of $4 billion had been identified, the combined effect of plummeting revenues and increased costs for welfare and medical assistance. The Commonwealth closed the FY2009 budget gap through a combination of budget cuts, stabilization fund transfers, and federal stimulus funds. The Commonwealth faced an even larger $4.8 billion budget gap in FY2010. With the stabilization fund severely depleted, the FY2010 budget gap was closed primarily by budget cuts, federal stimulus money, and a sales and use tax increase. Because of the Commonwealth's reliance on one-time money to close current budget gaps, a significant budget gap of at least $2.8 billion for FY2011 was identified soon after passage of the budget. In this paper we discuss the political and historic context in which the budget gaps occurred, outline the causes of the budget gaps, and evaluate the strategies employed to close them.     

Budget Deficits in the States: Illinois

During FY 2009 and FY 2010, the State of Illinois was faced with significant fiscal challenges. The national recession was adversely impacting the state's economy, while the state had been struggling since the last recession with operating budget deficits and large unfunded pension liabilities. In the spring of 2009, the Governor's Office of Budget and Management estimated that in the absence of any intervention, there would be a $4.3 billion budget deficit in FY 2009 and a $7.3 billion budget shortfall in FY 2010. This paper discusses the magnitude and nature of Illinois' fiscal problems and the factors that have contributed to this situation. It also discusses Governor Quinn's proposed budget for FY 2010, as well as the legislative response. Although the state passed a capital budget and an operating budget, the outlook for the future remains uncertain. The operating budget significantly relies on one-time revenue and funding sources (including $3.4 billion in debt) and the state has approximately $100 billion in unfunded accrued liabilities for pensions and other postemployment benefits.     

Budget Deficits in the States: Virginia

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Budget Deficits in the States: New York

New York faces large projected budget shortfalls. Although the recession has contributed, a large part of the shortfalls are due to long standing structural imbalances. The structural imbalances result from high spending levels, particularly on Medicaid and education, a volatile revenue structure, and political forces that make it difficult to achieve recurring spending reductions. In the most recent budget session, federal stimulus money allowed legislators to avoid the tough decisions needed to move the state toward long-run fiscal balance, and the adoption of increased income tax rates for high earners is likely to increase revenue volatility moving forward.     

Coping with Budget Deficits in Sweden

During the late 1970s and early 1980s Sweden's budget deficits grew more rapidly than in probably any other country of Western Europe. Government policy responses developed in three phases. In the late 1970s there was very little action taken to cope with run-away deficits. From 1980 to 1982 a strategy was formulated and partly implemented which heavily emphasized austerity measures through expenditure cuts. From late 1982 a 'mixed' strategy has been pursued which combines less drastic cuts with selected revenue increases. The virtual lack of response in the late 1970s and the turn-about in 1980 may be explained by reference to four major categories of factors: the severity and longevity of the economic crisis itself and the prevailing interpretations of its root causes; the dynamics of public sector growth and the understanding of the processes involved; the ideological and policy predispositions prevalent among policy-makers, economists, major interest groups and the public at large; and, finally, a set of 'organizational' factors mainly associated with the parliamentary situation in Sweden.     

Budget Deficits and Coalition Governments

This paper shows that compromise between different ideologicalmotivations within multiparty governments may result in a biastoward running budget deficits even if all parties in thecoalition prefer balanced budgets. The deficit bias increases withthe degree of ``polarization'' of the ideological motivations andgenerally decreases with the degree of concentration of powerwithin the government. Although the analysis is conducted assuminga proportional representation electoral system, the results willalso apply to majoritarian systems if the winning party comprisesideologically different constituencies. The relationship betweenbudget deficits and multiparty governments is investigated usingdata from a sample of eight European Union countries for the period1971–1990. Analysis on pooled data is partly in line with the theory.Time series within country analysis is less favorable: we findclear support to the theory only in the case of Italy.     

财政赤字风险:一个新的分析框架

财政赤字风险是由于各项制度的不确定性而导致财政赤字实际效应与预期效应不一致的可能性。财政赤字总量指标并不能完全、真实地反映财政赤字的效应,必须分析财政赤字的效益、结构。     

Deficits, Soft Budget Constraints and Bailouts: Budgeting after the Norwegian Hospital Reform

In the 1990s, the Norwegian hospital sector was characterized by soft budgetary constraints and increasing budget deficits. This was one of the main antecedents of the 2002 hospital reform, where the central state took over ownership of the hospitals from the counties. Arguably, the centralization of ownership, financing and production would harden the budget constraints and increase the budgetary discipline. This analysis shows that this has not been accomplished. Instead, the production has been far above what was planned, and the deficits higher than ever. Two stages of the post-reform budget processes are analyzed: first, the stage where the central state set the budgets and sends signals of budgetary rules (whether the state sends signals of soft or hard budget constraints), and second, how the central state handled deficits in the hospital sector as they emerged (whether the hospitals was bailed out or not). The conclusion is that the central state neither set a hard budget constraint nor managed to stay firm as deficits turned up. It is argued that three mechanisms explain the prevailing problems of managing the hospital sector: uncertainty of the hospitals' financial situation during the transition phase; minority governments; and specific features related to the organization of the budgetary process in parliament.     

Does the Wage Tax System Cause Budget Deficits A Macro-Economic Experiment

In this paper we investigate experimentallythe economic functioning of a wage taxsystem for financing unemployment benefits in aninternational economy, in particular inreaction to budget deficits and taxadjustment. Our results support the hypothesisthat due to out-of-equilibrium priceuncertainty producers are reluctant toemploy inputs. We also observe a downward pressureon wages exacerbated by an over-supply of labor by consumers. Theseobservations can explain the budgetdeficits found. Furthermore, we find that taxadjustments in order to facilitate abalancing of the budget has strong adverse effects onunemployment and real GDP.     

Budget deficits and interest rates in the United States

In this paper, an attempt has been made to reexamine the effect of budget deficits in the United States on interest rates. Unlike the previous studies which use only one definition of the dependent variable, we have used all three, namely, the nominal and the ex-post and the ex-ante real interest rate. Further, unlike previous studies, we considered both short-term and long-term interest rates. Our results provide absolutely no support for the proposition that federal deficits affect interest rates and thus contradict the recent findings by Cebula (1987) and Kolluri and Giannaros (1987). Finally, the paper provides some further support for the inverted Fisher hypothesis proposed by Carmichael and Stebbing (1983).Thanks are due to Zheng Wei for research assistance.     

Budget Deficits, Hyperinflation, and Stabilization in Ukraine, 1991–96

Since gaining independence in 1991, the former Soviet republic of Ukraine has been plagued by persistent fiscal deficits and punctuated periods of rampant inflation. Having few options to cover the fiscal deficit, Ukraine in 1992–94 largely resorted to money creation. The result was that hyperinflation broke out in late 1993, its burden falling mainly on households, but also eroding the capital of state enterprises. Falling revenues and robust expenditures—even in the face of the continuing output collapse—were exacerbated by a policy of lavishing large amounts of cheap credits on state enterprises. This article reviews and analyzes the causes of Ukraine's inflationary impulse, the descent into hyperinflation in 1993–94, its effects, and the subsequent drive to stabilization by 1996. It concludes that a substantial erosion of the inflation tax base by late 1995 propelled the government to pursue stabilization through an IMF-sponsored program of fiscal restraint. A two-year drive to fiscal and monetary stabilization ensued. Stabilization was largely achieved by mid-1996, permitting a currency reform in September.     

Tax Expenditure Budgets, Budget Policy, and Tax Policy: Confusion in the States

A tax expenditure budget should contribute to efficient and effective public decisions by quantifying the division in the tax structure between provisions that represent revenue policy (distribute the cost of government according to the legislated tax base) and parts that represent budget policy (substitute for direct spending). For this transparency to have the desired impact, however, the tax expenditure budget process and the direct expenditure process must be properly integrated and the tax expenditure budget must make an accurate division between the parts of the tax structure. A review of the 33 states with tax expenditure systems shows many weaknesses in application of the concept and poor linkage to the direct spending budget system. Their most significant flaw is in dividing the tax structure into normal and preference elements; states need greater attention to defining their basic tax structure if they are to have a meaningful tax expenditure budget.     

Government Strength, Power Dispersion in Governments and Budget Deficits in OECD-Countries. A Voting Power Approach

We test for the influenceof government strength and dispersion ofpower among the parties of coalitiongovernments on the size of annual debtaccumulation through budget deficits inOECD-countries from 1970 to 1999.Government strength and power dispersion incoalition governments are measured by theBanzhaf index of voting power, respectivelythe standard deviation of Banzhaf indicesof coalition parties. We believe that theseare better-suited proxies than most of whathas been applied so far. Governmentstrength turns out to be insignificant.However, coalitions with equally strongpartners run significantly higher deficitsthan coalitions with one dominating party.     

The State of the Tobacco Settlement: Are Settlement Funds Being Used to Finance State Government Budget Deficits? A Research Note

In the Master Settlement Agreement, the major U.S. tobacco companies agreed to pay approximately $229 billion between 1999 and 2025 to 46 states, the District ofColumbia, and five U.S. territories. The windfall raises important spending andfinancing decisions for state governments. This research note analyzes how governments are spending their settlement proceeds, especially whether states are using funds to finance current budget deficits, and investigates the financing practice by several states of selling their right to future settlement proceeds to support the issuance and repayment of tobacco securitization bonds.     

Improving the Budget Process in Fragile and Conflict‐Ridden States: Two Modest Lessons from Afghanistan

Both the donor community and scholars have created a cottage industry studying “fragile” states. International nongovernmental organizations that have developed indexes measuring corruption or governance have been unkind to Afghanistan. One index suggests a different and more optimistic story. The International Budget Partnership measures transparency every two years with its Open Budget Index. Afghanistan demonstrated dramatic improvement on this index between 2008 and 2012. The authors use the improvement in Afghanistan's transparency score as an entry point to explore how donors try to intervene and promote transparency as part of broader efforts in public financial management development and how legislative strengthening has also contributed to budget reform. The analysis offers a modest corrective to the overly pessimistic assessments of fragile states by showing that a fragile state can improve its budgetary transparency and enhance governance by strengthening the legislature's involvement in the budget process.