Finance and Economics Discussion Series

State and Local Finances and the Macroeconomy: The High-Employment Budget and Fiscal Impetus

Glenn Follette, Andrea Kusko, and Byron Lutz
2009-05

Abstract: We examine the interplay of the economy and state and local budgets by developing and examining two measures of fiscal policy: the high-employment budget and fiscal impetus. We find that a 1 percentage point increase in cyclical GDP results in a 0.1 percentage point increase in NIPA-based net saving through the automatic response of taxes and expenditures. State and local budget policies are found to be modestly pro-cyclical. Stimulus to aggregate demand is about 0.2 percentage point less following a business cycle peak than it is during the period before the business cycle peak.

Keywords: High-employment budget, fiscal impetus, net saving, fiscal policy, state and local government, budget policy