Do U.S. State Balanced Budgeting Practices Make Sense? Alternatives from the Eurozone

The purpose of this article is to challenge the balanced budgeting 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. This is a normative article. We examine the scholarly evidence regarding balanced budgeting 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. 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 states have access to affordable credit. 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 based upon the fiscal rules followed by Eurozone countries.