Do balanced budget practices of U.S. states make sense? Alternatives from the Eurozone

Abstract

Purpose The purpose of this article is to challenge the balanced budget practices of U.S. state governments and offer alternatives that may lead to better fiscal, economic and policy outcomes. We contend that the norm of balance may be leading U.S. states to make fiscal decisions that result in less-than-ideal outcomes, especially during economic downturns.Design/methodology/approach This is a normative article. We examine the scholarly evidence regarding balanced budget practices to assess the appropriateness of balanced budget norms. We also examine the fiscal rules followed by Eurozone countries to draw potential lessons for U.S. states.Findings We conclude that state governments should move away from strict norms of budget balance and seek more flexible approaches. We suggest that instead of following strict rules and norms of balance, U.S. states should consider implementing escape clauses, debt and deficit ceilings, and fiscal councils. We also suggest that the Federal Reserve be open to lending directly to states during fiscal crises to ensure that states have access to affordable credit.Originality/value The balanced budget norm has become ingrained in U.S. state budgeting practices, so much so that public officials and scholars alike rarely question it. The novel contribution of our article is to question this practice in a systematic way and propose alternative approaches.

Editorial: Debts, deficits, and inflation: prescriptions for the future

“…As Douglas and Raudla (2024) show, discussions on the architecture of fiscal rules in the US states can draw insightful lessons about the experiences of Eurozone member states. Douglas and Raudla (2024) argue that the excessive commitment to balanced budget rules in the US states has problematic consequences for the economy and the provision of public services. In adhering to balanced budget rules, state governments in the USA have become more procyclical since the mid-1980s, leading to more sluggish recoveries (Bi et al , 2023).…”

“…The experience the European Union has had with various fiscal governance arrangements over the past decades – including escape clauses, structural budget deficit rules and fiscal councils – can offer guidance for rethinking the fiscal rules employed by the US states. Douglas and Raudla (2024) also suggest that the Federal Reserve remain open to lending directly to states during fiscal crises to ensure that states have access to affordable credit.…”

“…Those measures were intended to be temporary, however, and in going forward, a permanent fiscal capacity should be designed. Douglas and Raudla (2024) and Georgiou (2024) present somewhat different answers to the question of how permanent fiscal capacity (at the central level) and fiscal rules at the state (or member state) level relate to each other. Georgiou (2024) suggests that the creation of central fiscal capacity for the EU would reduce the need for strict fiscal rules for member states.…”

“…Two articles in the symposium – by Georgiou (2024) and Douglas and Raudla (2024) – focus on fiscal issues and discuss the challenges of deficit and debt in the European Union and US states. The two remaining articles examine the topic of inflation and its implications for fiscal policy: Nersisyan and Wray (2024) focus on the federal government level and Martell (2024) on the local government level in the USA.…”

“…Georgiou (2024) suggests that the creation of central fiscal capacity for the EU would reduce the need for strict fiscal rules for member states. Douglas and Raudla (2024), however, argue that despite the central fiscal capacity that is available from the federal government in the USA, there is still a need for more sophisticated fiscal rules at the state level.…”