The Impact of State Policies to Limit Debt Financing

Abstract

The growing use of debt financing by all governments in the United States has attracted the attention of many observers.' Numerous observers have expressed alarm at that growth and have called for limitations on debt financing. The analysis that follows will assess the effectiveness of provisions designed to restrict the use of debt financing by state governments. Some analysts regard the growth in government debt as an inevitable outgrowth of public-sector budget processes. Agency officials seek to demonstrate their influence and to please program clienteles by pressing for expansion of agency budgets and preservation of established programs. Crises, citizen demands, and interest-group lobbying create pressure to provide more support for public programs, particularly when spending items are considered individually rather than in the context of overall totals. Elected officials try to placate program beneficiaries by approving increased appropriations, but taxpayers resist revenue increases. Deficit financing, therefore, offers direct, immediate benefits: more program benefits and lower taxes. The risk of resulting inflation is uncertain and remote; the cost of repaying the debt can be shifted partly to future generations.2 The combination of pressures to spend and reluctance to raise revenues produces an almost irresistible urge to finance programs by borrowing. Adherents of this perspective suggest that reforms of the budget process may be necessary in order to bring the situation under control. Balanced budget requirements, debt limits, and greater executive powers to restrain spending are among the reforms that have been proposed in order to reduce or eliminate reliance on borrowing.3