Counter-cyclical and fiscally conservative trends in US Budget behaviour

In this section we seek to expose the impact of the ARRA and whether or not the budget behaviour was systematically counter-cyclical, fiscally conservative, or none of the above. In order to simulate the impact of the ARRA we produce estimates of what spending changes would have been without the ARRA funds designated to states. To test whether behaviour has been counter cyclical or fiscally conservative, we define the former as total tax cuts plus spending increases and the later as total tax cuts and spending cuts and run these two dependent variables on the usual independent ones.

The effect of the ARRA

The Center for Budget and Policy Priorities reported in their June 29^th article that “Federal Fiscal relief is working as intended”.[36] Indeed, the article uses the two concrete examples of New York and Virginia who revised their enacted budgets for 2010 shortly after the American Recovery and Reinvestment was passed. They find that Virginia was able to close 37% of its budget shortfall through the use of the funds and that New York was able to close its shortfall by about 31%. We can obtain estimates of the impact of the State fiscal stabilisation funds through the ARRA for all states by subtracting each state’s additional allocation from its enacted spending. The resulting figure 1.3 below is a rough estimate of spending changes net of the ARRA funds. The figure illustrates the potential impact that the ARRA funds had on spending changes from FY2009 and FY2010, which largely was able to prevent states from reducing their spending cuts by very significant amounts. As illustrated, most states were able to maintain fairly similar levels of spending from 2009 to 2010, largely thanks to the funds. Furthermore, the graph is also illustrative of the idea that the ARRA funds were used primarily to balance budgets, and that very little spending increases or counter-cyclical behaviour actually resulted from the funds. Only ten states are estimated to have been able to increase their spending due to the funds, three were able to increase their already positive change in spending, and all other states (37) were at a maximum able to maintain spending levels due to the funds (See figure 1.3 below).

Figure 1.3

Spending change from FY 2009 to FY 2010 as a proportion of 2010 spending, actual left and estimated (right) spending net of ARRA assistance by state (alphabetically from Alabama to Missouri and below from Montana to Wyoming).

Source: Author’s calculations

Date: 2016-04-22; view: 589