| Abstract: | Accurately predicting revenue growth is nearly impossible. Predicting the peaks and valleys of the business cycle is even more hopeless. This matters because tax revenues are largely driven by economic growth. Volatile, unpredictable revenue growth causes all sorts of unpleasant responses on the part of governments, most commonly manic-depressive patterns of spending and taxing. Fortunately, modern financial economics gives us a set of tools that can be used to manage volatility. This article shows how such tools can be used to inform fiscal decision making. The focus here is state governments, but the analysis applies to all jurisdictions that face hard budget constraints and therefore must balance spending increases against revenue growth. |
