Balanced Budget Rules and Fiscal Policy: Evidence from the States

The persistence of fiscal deficits in many industrial democracies has spawned a vast theoretical literature in political economy on why nations run budget deficits, along with a sharp policy debate concerning fiscal institutions that might reduce these deficits. The debate on fiscal institutions, such as proposed balanced budget amendments for the federal government, involves relatively little empirical evidence on the potential effects of such institutions. The lack of such evidence can be traced to several factors. First, some of the proposed institutions under discussion are budgetary innovations that have not been tried on a national or subnational scale before. Second, there is relatively little intranational variation over time in the nature of budget processes. Therefore, it is difficult to compare fiscal policy before and after significant institutional reforms. Third, while there are differences across countries in fiscal institutions, many analysts are hesitant to draw strong conclusions from cross-national comparisons because it is difficult to hold constant other factors that may affect fiscal policy.