Late Budgets

Abstract

The budget forms the legal basis for government spending, and timely budgets, enacted before the new fiscal year, are an integral part of good governance. This paper examines the causes of late budgets using a unique dataset of budget completion dates for US state governments 1988–2007, constructed from news reports and state budget office surveys. We find 23 percent of state budgets to be late. We show that changing economic circumstances and divided government are the driving forces behind late budgets, which is consistent with a war-of-attrition bargaining model featuring budget baselines and preferences over deviations from such baselines. (JEL C78, D72, H61, H72)

Intergovernmental Costs of Political Gridlock: Local Government Cash Flow Smoothing during State Budgetary Delays

“…The second type of divided governments refers to split legislature, where different parties control the two chambers. Andersen, Lassen, and Nielsen (2012) found both split branch and split legislature to increase the probability of a late budget by about 10 percentage points; they may also increase the length of the budget delay, although the finding there is statistically insignificant. Other papers used the combined, one-variable measure of divided government.…”

“…Although the causes of budgetary delay have been widely explored, research on its consequences is limited to the electoral prospect and ambition of incumbents, voter trust in governments, and government future borrowing costs (Binder 2003;Layman, Carsey, and Horowitz 2006;Andersen, Lassen, and Nielsen 2012). 1 While anecdotal evidence suggests that budgetary delays impose uncertainty on individuals and organizations interacting with the government, there is limited effort in empirically testing for and quantifying such an impact.…”

“…That is, state budgetary delays may be an exogenous shock to localities. However, economic downturns could increase the probability of late state budget (Andersen, Lassen, and Nielsen 2012), and at the same time, local governments operating within the same economic environment may face a higher demand for short-term debt. To address the omitted variable problem, this article instruments for late budget using divided state government, which may not affect local borrowing directly but only through state budgetary delays (Lu and Chen 2016;Kirkland and Phillips 2018).…”

“…While state constitution or statutes may define a deadline for the legislature to pass budget bills, the threat of no funding and possible government shutdown becomes tangible with the approaching of the new FY because an enacted budget provides the spending power for the upcoming FY (Andersen, Lassen, and Nielsen 2012). After both chambers of the legislature reach an agreement, the governor signs the budget, marking the enactment of the budget into law.…”

“…Most of the academic research attempts to explain why the state legislative and executive branches could not reach an agreement and pass a budget on time. The consensus emerging from this discussion is that divided governments contribute to budgetary delays (Andersen, Lassen, and Nielsen 2012;Lu and Chen 2016;Kirkland and Phillips 2018). 5 Two types of divided governments may be at play.…”