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date: 19 August 2019

Abstract and Keywords

This article analyzes the recent budget challenges that have prompted examination of the role of state and fiscal institutions such as balanced budget rules, tax and expenditure limits, debt restriction, and “rainy-day,” or budget stabilization, funds. Some commentators argue that stronger fiscal rules could have helped avert the 2008–2011 (and, still continuing) state and local budget crises. Others contend that rules already in force have exacerbated the budgetary effects of the Great Recession and that continuing with them as currently structured will not only make more difficult fiscal recovery but will also undermine the traditional role of the states in the federal system. California's demonstration of how such institutions can take a state from fiscal health and stability to near bankruptcy is a dramatic case, especially for those critics who are currently making the argument that institutions can lead to particularly severe unintended consequences. In contrast, as this article notes, legislatively imposed institutions, if well designed, can lead to increased public and social accountability.

Keywords: fiscal institutions, balanced budget, tax limits, expenditure, debt restriction, Great Recession

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