Boom-Year Savings and Budgetary Forecasting

The forecasting of government expenditure and revenue is the outcome of complicated, often intense interaction between multiple key players in the budgeting process and multifarious aspects of government operations. The existing literature is very rich on the technical aspects but is relatively thin on the impact of institutions under the public choice perspective, especially those in financial administration, the budget stabilization fund (BSF) being a typical example. This chapter aims to fill in the niche by focusing on how BSF affects forecasting. BSF as a countercyclical fiscal policy tool was created as precautionary savings against revenue shortfalls, serving to reduce financial uncertainty from cyclical fluctuations. BSF is a formal institution with an underlying public choice motive to promote fiscal and budgetary transparency: BSF legislation is written to protect savings from political spending pressure and opportunistic electoral politics. However, public finance does not operate in vacuum; BSF cannot stay free of politics. Presence of savings inherently triggers complications in the politico-technical forecasting machine. This chapter examines state forecasts of their revenue with a BSF in place to see whether adopting BSF has any impact on forecast errors and how the structural features and size of BSF influence the forecasting behavior. I use a panel (49 states, ­1979/1988–2007) plus details of state BSF features, with controls for state demographics, economy, politics, and other budgetary institutions. This chapter will contribute to the public choice literature by providing evidence on the effects of BSF on behavioral changes of state governments in their revenue forecasts.