Output fluctuations and fiscal policy: US state and local governments 1978-1994

We study the cyclical properties of U.S, state and local government fiscal policy. The budget surpluses of both are procyclical over short- and medium -term horizons. Procyclical surpluses are the result of strongly procyclica l revenue and weakly procyclical expenditure. These results hold whether ag gregate (U.S.-wide) fluctuations are controlled for or not. Federal grants to state and local governments are procyclical, but this is due to aggregat e output fluctuations: With respect to state-level output fluctuations, fed eral grants are countercyclical. The budget surpluses of trust funds and ut ilities are also procyclical, but there is no evidence that this effect is stronger in states where balanced budget rules are tighter. The cyclical pa tterns of state and local budget surpluses are affected by various politica l institutions; for example, budget surpluses are less procyclical in conse rvative states. In an election year that occurs in 'good times', state gove rnments refrain from accumulating a larger surplus. In 'bad times', no such asymmetry between election and non-election years is apparent. (C) 2001 El sevier Science B.V. All rights reserved.