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Budget Slack, Institutions, and Transparency

Authors

  • Shanna Rose,

    Corresponding author
    1. New York University
      Shanna Rose is assistant professor of public finance in the Robert F. Wagner Graduate School of Public Service at New York University.
      E-mail:shanna.rose@nyu.edu
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  • Daniel L. Smith

    Corresponding author
    1. New York University
      Daniel L. Smith is assistant professor of public budgeting and financial management in the Robert F. Wagner Graduate School of Public Service at New York University.
      E-mail:daniel.smith@nyu.edu
    Search for more papers by this author

Shanna Rose is assistant professor of public finance in the Robert F. Wagner Graduate School of Public Service at New York University.
E-mail:shanna.rose@nyu.edu

Daniel L. Smith is assistant professor of public budgeting and financial management in the Robert F. Wagner Graduate School of Public Service at New York University.
E-mail:daniel.smith@nyu.edu

Abstract

Economic theory suggests that it is optimal for governments to use precautionary saving as a countercyclical tool. However, the availability of surplus funds often triggers political pressure for tax cuts and spending increases. Mechanisms for alleviating that pressure include limiting the transparency of slack resources and limiting politicians’ discretion to use slack resources for purposes other than stabilization. This article investigates the extent to which these two mechanisms are substitutes. In particular, the authors examine whether the widespread adoption of budget stabilization funds (BSFs) in the U.S. states over the past several decades has been accompanied by a decline in conservative revenue forecast bias. Using panel data from 47 states over a 22-year period, they find that the adoption of a BSF reduces revenue underestimation by approximately two-thirds; however, the size of the effect depends in part on how much a state saves in the BSF and the rules governing BSF deposits and withdrawals. The results suggest that BSFs have the unintended effect of increasing fiscal transparency.

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