ABSTRACT
Fiscal governance rules are viewed as prudent tools that promote balanced budgets, lower tax burdens, and ensure modest use of long-term debt. However, these rules can create incentives that inadvertently worsen the government’s long-term financial position. Focusing on unfunded retiree benefits and long-term debt, this study finds that states subject to political balanced-budget requirements report higher unfunded pension benefit obligations and higher debt burdens. In contrast, anti-deficit provisions and limits on taxing authority are associated with lower unfunded retirement benefits. Findings suggest fiscal rules can worsen a government’s long-term financial position in ways not visible in the operating budget.
Summary
- Virtually every state has adopted fiscal governance rules to limit economic actors and ensure prudent management of resources.
- These rules are often presumed to have the intended impact on government finances, including promoting balanced budgets, lowering tax burdens, and restraining long-term borrowing.
- This study finds that fiscal rules can worsen a government’s long-term financial position in ways not visible in the operating budget.
- The effectiveness of any fiscal governance framework depends on how it shapes policymakers’ perceived costs of deviating from desirable policies.
- Findings highlight the need to reassess fiscal rules to ensure they support sustainable long-term financial management rather than merely short-term budget balance.
Public Budgeting. & Financing
by Sharon N. Kioko
15 June 2026