How and when do structural deficits reveal themselves? The case of indiana

Do state governments have the ability to predict the onset, duration, and depth of structural fiscal crisis? The State of Indiana had a particularly difficult time recovering from the recession that began in April 2001. Painful expenditure restraint and substantive revenue increases were necessary simply to “break even” from 2002 through 2006. Could early warning signs have permitted more timely actions to avert the subsequent pain? Using monthly cash receipts and balances, we test whether these data hold predictive value in forecasting the onset and severity of fiscal imbalance. The evidence strongly suggests that the structural character of the 2001-02 deficit and its subsequent depth was discernible in the cash receipts stream early enough to take ameliorating action. That the state did not do so reflects budgetary psychology more than the deficit’s predictability.