Budget Stabilization Fund in Interaction with Balanced Budget Requirements

Abstract

In this chapter, I examine how the budget stabilization fund (BSF) interacts with balanced budget requirements (BBR); that is, in what way and to what extent the saving behavior of state governments is affected by the adoption of the stabilization fund in a BBR environment. While BBR are a long-standing institution, BSF is new. Though these two budgetary institutions were adopted for different reasons, both could have exerted substantive influences on state saving behavior, depending on the unique design features of the two in each state. This chapter empirically tests the effects of BSF and BBR on state savings covering three economic cycles. The 25-year (1979–2003) panel data also include information on state economy, social services, politics, and economic cycles. The results show that the adoption of a BSF can raise state savings level by 2.5% points; however, the effects depend crucially on the design of BSF, and that BBR rules requiring state own-source revenue to match budgeted expenditures and requiring the legislature to pass a balanced budget may also boost the savings level.