(Download) "State Fiscal Crises: Are Rapid Spending Increases to Blame?" by The Cato Journal # Book PDF Kindle ePub Free
eBook details
- Title: State Fiscal Crises: Are Rapid Spending Increases to Blame?
- Author : The Cato Journal
- Release Date : January 22, 2008
- Genre: Politics & Current Events,Books,
- Pages : * pages
- Size : 251 KB
Description
During recessions, state governments frequently face substantial midyear budget shortfalls. Numerous states are now experiencing such crises again. These fiscal crises are often blamed on the cyclical decline in revenue growth or reductions in federal aid. Others have suggested that enacting rapid spending increases during expansionary years--rather than using the revenue windfalls for tax cuts or increases in rainy day funds--may be an important contributing factor to those budget shortfalls. Using data from the 2001 recession, we find support for that "overspending" hypothesis. While neither the mere presence nor the size of a rainy day fund were significant predictors of fiscal stress, faster increases in spending are positively and significantly associated with fiscal stress. When rainy day funds work, it is the strength of their withdrawal rules that matter. These results have important implications for fiscal policy choices. States that restrain spending growth during expansionary years and implement strong rainy day fund withdrawal rules are likely to face less severe fiscal crises during recessions. Cyclical fluctuations of state tax revenue create challenges for politicians. In periods of economic expansion, revenues flow in faster than expected. How those windfall revenues are used can have a major impact on what happens during subsequent periods of economic contraction when revenues flow in slower than expected. (1) Politicians have three basic choices: (1) use the windfall revenues to fuel larger spending increases (by establishing new programs and expanding existing ones), (2) deposit them in a budget stabilization fund, often called a rainy day fired (RDF), or (3) return them to taxpayers by cutting taxes. Compared to options two and three, increased spending tends to create a larger "crisis" when revenue growth eventually slows due to a recession. The reason is that when that rapid spending growth is used to establish new programs, it creates new groups of beneficiaries who have an interest in maintaining and expanding those new programs. Furthermore, large spending increases in current years tend to create expectations for large spending increases in subsequent years (in part due to current services budgeting processes). In fact, when spending growth for a program falls--from say a 5 percent increase to a 4 percent increase--that slowdown in spending growth is often labeled a spending "cut." Those changed expectations do not tend to occur when windfall revenues are returned through tax cuts or saved for a rainy day.
 "State Fiscal Crises: Are Rapid Spending Increases to Blame?" by The Cato Journal # Book PDF Kindle ePub Free){kind=link}