Abstract
As one of the main products and accomplishments of the budget reform movement (1890-1910), the annual budget model once played an important role in the management of the state and local governments as an effective tool for government expenditures control and fiscal management. However, over the past century, the shortcomings in the annual budget are also apparent. The annual budget is not an effective tool for fiscal planning and often leads to cyclical deficits that are hard to solve, making it difficult for the government to go beyond the economic cycle to maintain financial stabilization. Therefore, a new round of budget reform needs to be initiated. State government budget stabilization: Policy, tools, and impacts seeks to respond to the above-mentioned issues and to address the following questions: Why should we transit from annual budgeting to multi-year budgeting? What is the technical foundation of multi-year budgeting? And what are the policy tools for multi-year budgeting?
This book provides a theoretical exploration of a new budgeting system designed to address fiscal uncertainty and instability. Through studying the annual budget balance under the guidance of policy needs, this book proposes that the traditional annual budgeting cycle causes imbalances between the budget cycle and the continuation of public services. Multi-year budgeting is a potential solution, whereby counter-cyclical fiscal reserves are used to ensure fiscal stabilization amid economic fluctuations. The extension of the budgeting perspective from 1 year to longer time frames could enhance the planning function of budgeting. By adopting a budget stabilization fund (BSF) and retaining sufficient fiscal reserves, the state government may maintain a consistent level of public services during recessions. Panel data analysis has provided empirical evidence that this type of fund has stabilized government expenditures during economic recessions. As multi-year budgeting relies heavily on the accurate assessment of income and expenditure, and technical deficiencies in forecasting are unavoidable, as a result, the multi-year budget model has become an inconvenient tool (Boex, Martinez-Vazquez, & McNab, 2000).
The subnational counter-cyclical fiscal policy (CCFP) theory (Gramlich, 1987) provides technical support to the expansion of the budgeting perspective. This theory upholds that the state and local governments can accumulate sufficient fiscal reserves during years of fiscal surpluses, so that the financial stabilization may be maintained during poor fiscal years. The framework of the CCFP and its tools can become the core of multi-year budgeting to ensure the stabilization of budget across economic cycles.
This book can be divided into four sections. The first section clarifies the process by which the subnational government function shifts from its role of economic stabilization to the role of budget stabilization, whereby the application of the CCFP helps to accomplish this transition. This book offers two major components of the CCFP that have been commonly used. The first is the general fund surplus (GFS), which is a mechanism that spans across fiscal years/budget cycles. The GFS requires detailed legal provisions to define issues such as financial resources, purposes, applicable procedures, post expenditure fund supplement, and so on. The second component is the BSF, which is an unrestricted and undefined general fund balance at the end of a fiscal year.
The second section of the book discusses how the state government reserves funds amid economic booms and the impact of these reserve funds during economic recessions. Through empirical research, this section mainly discusses the interactions between the GFS and the BSF, the two common counter-cyclical fiscal instruments; including discussions on how the BSF supplements the state reserves when it is introduced and to what extent the BSF could replace the GFS. This section also examines how the structural characteristics of the BSF influence the reserve level during economic booms under the conditions of balancing budgeting requirements. The impacts of several cycles of reserves during economic booms on the three types of state expenditures (i.e., general expenditure, general fund expenditure, and own-source expenditure) are also provided in this section. Last, by integrating the CCFP into the counter-cyclical fiscal capacity (CCFC), and combining the CCFC with governance capacity, the impacts of the CCFP on budget cuts, tax increases, and net income change during recessions are also examined.
The third section of this book discusses the significance of the CCFP to budgeting and fiscal management. Although maintaining a balanced annual budget plays an important role in restricting government behaviors, annual budgeting also causes the budgeting system to be somewhat inflexible, so that the budget is unable to respond to the needs of the budget policies effectively. The shift in the formulation and execution of budget from annual to multi-year perspective has solid theoretical foundations, that is, the balanced budget depends on the economic cycle instead of the fiscal year. This section analyzes how the BSF and the GFS impact the potential of revenue forecast. It considers the use of debts as an instrument of the CCFP and discusses how the use of debts helps states to stabilize budget during economic recessions.
The fourth section provides reviews and prospects for the level of subnational government budgeting stabilization. It examines another fiscal policy tool, the intergovernmental grant, and advocates its counter-cyclical effectiveness. This chapter proposes a fiscal policy framework based on the establishment of a supportive foundation of fiscal grants for infrastructure and public services, as well as support for employment through tax reliefs. With the federal government participating in the coordination between federal and state policies, this chapter discusses economic stabilization beyond budgetary stabilization.
This book has important implications for the theory and practice of public finance and public budget. On the theoretical level, this book clearly defines the role of the subnational government in macroeconomics, that is, to offer balanced public services mainly through the stabilization of budgeting, instead of economic stabilization. This book further defines the CCFP and combines it with governance. As for public budgeting, this book uses empirical data for discussing the effects of the reserves, and holds significant implications to the improvement of the budgeting theory. From the policy perspective, this book provides the usefulness of reserves during economic booms, as well as a large quantity of empirical evidences. Policy recommendations have been proposed in many chapters of this book, and these recommendations are worth the attention of practitioners, as some of the policies may be improved by experts in this area and become useful tools.
The implementation of multi-year budgeting faces obstacles arising from its mismatch with the budget policy. For multi-year budgeting to win the support of legislators, one must know how to satisfy the legislators’ budget policies based on annual arrangements. In addition, this book advocates the transition from annual to multi-year budgeting, and emphasizes the planning function of budgeting; however, it does not simultaneously consider the impact of this transition on the control function of budgeting, which is likely to raise a new problem while solving the old one. Further discussions are required to address the issues of matching multi-year budgeting with legislators’ budgeting policies based on annual arrangements, as well as maintaining the control function of budgeting while strengthening the planning function of budgeting.