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Changing Red to Black: Deficit Closing Alchemy

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  • Petersen, John E.

Abstract

States and many localities face the direst fiscal situation that they have encountered in the last 60 years or so, with revenues falling or stagnant while expenditure demands continue to grow. This divergence in incomes versus outgoes means that most states face recurring operating fund deficits that must be closed by one means or another. There is a multitude of means to accomplish such closure. The focus here is on the ways in which this can be done other than by actually raising tax rates or reducing spending. Rather, balance is achieved through changes in the balance sheet, in changing the assumptions that underlie the budget, in altering the timing and recognition of various flows, or in redefining what constitutes revenues and expenditures in a budget or, for that matter, the budget itself. Thus, budgets can be given the appearance of balancing. However, temporizing sleights of hand become fewer in number and more expensive to implement when deficits prove to be structural in nature and outflows persistently exceeds inflows. Illusionary budget balancing in the face of structural problems entails long-term costs and compound fiscal stress over time. How one views these results depends very much on one’s political objectives.

Suggested Citation

  • Petersen, John E., 2003. "Changing Red to Black: Deficit Closing Alchemy," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 567-577, September.
  • Handle: RePEc:ntj:journl:v:56:y:2003:i:3:p:567-77
    DOI: 10.17310/ntj.2003.3.08
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    Cited by:

    1. Steven M. Sheffrin, 2004. "State Budget Deficit Dynamics and the California Debacle," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 205-226, Spring.
    2. Timothy C. Irwin, 2015. "Defining The Government'S Debt And Deficit," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 711-732, September.
    3. Mr. Mike Seiferling & Mr. Shamsuddin Tareq, 2015. "Fiscal Transparency and the Performance of Government Financial Assets," IMF Working Papers 2015/009, International Monetary Fund.
    4. Iwona Franczak, 2021. "Creative Accounting in Poland’s Sub-Sector of Local Governments," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 997-1017.
    5. James Alm & Carolyn J. Bourdeaux, 2013. "Applying Behavioral Economics to the Public Sector," Hacienda Pública Española / Review of Public Economics, IEF, vol. 206(3), pages 91-134, September.
    6. Fabrizio Balassone & Daniele Franco & Stefania Zotteri, 2006. "EMU fiscal indicators: a misleading compass?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 33(2), pages 63-87, June.
    7. Mr. Mike Seiferling, 2013. "Stock-Flow Adjustments, Government’s Integrated Balance Sheet and Fiscal Transparency," IMF Working Papers 2013/063, International Monetary Fund.
    8. Javier Garcia-Lacalle & Lourdes Torres, 2021. "Financial Reporting Quality and Online Disclosure Practices in Spanish Governmental Agencies," Sustainability, MDPI, vol. 13(5), pages 1-21, February.

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