Bohn ’ s Test of Fiscal Sustainability of the American State Governments

The dramatic fall in state government revenues during the “Great Recession” and the resultant large budget deficits accentuated concerns about the fiscal sustainability of state finances. We use a modelbased approach proposed by Bohn (1998) to test for state fiscal sustainability. In this approach, a positive response of the primary surplus to government debt (both as a ratio of output) constitutes a sufficient condition for sustainability. We use the data for panel of 48 contagious states (1961-2008) and several model specifications that control for measures of cyclical variations in state output and government expenditures, presence of balanced budget requirements in state constitution or statutes, the partisan balance of the state government, and /or regional factors. We found consistent evidence in favor of state fiscal sustainability. Our results also suggested that the primary surplus ratio was higher in states with a higher degree of fiscal stringency in general and “own-revenue” and “nodeficit-carryover” anti-deficit provisions in particular. Finally, we found mixed results in relation to the effects of the partisan balance and divided state government on the primary surplus ratio.