Fiscal Stringency and Fiscal Sustainability in the American States: Panel Evidence Fiscal Stringency and Fiscal Sustainability in the American States: Panel Evidence

Unlike the federal government, most state governments in the U.S. formally operate under statutory or constitutional constraints which limit their ability to run budget deficits and resort to debt financing. A priori, one would expect to find evidence in favor of an intertemporally balanced budget, or fiscal sustainability, among states, especially those that are characterized by a high degree of fiscal stringency. We test this hypothesis in a panel of 47 contiguous states over the period 1961-2006 using four budget balance definitions and subsamples defined on the basis of whether certain balance budget requirements (BBRs) are in place. Our results, obtained from panel estimation techniques that allow for cross-state dependence, suggest that a sufficient condition for “strong” fiscal sustainability is satisfied in most cases. However, we do not find conclusive evidence that in these cases strong (weak) sustainability is due to the presence (absence) of BBRs. JEL Classifications: H71; H72; C33 .