Facing fiscal crisis: Managing counter-cyclical debt financing of the state and local governments

The recent recession provides us a good window to reveal fiscal problems and inadequate preparations of state and local governments. To address the fiscal crisis, and more importantly, to prepare for the potential economic downturns, this paper designs a framework of necessary tools to combat fiscal crisis. With matching policies of revenue diversification and counter-cyclical fiscal policy (CCFP), debt financing can be used as an effective tool to help state and local governments pull through fiscal crises. A brief example of local governments in Georgia proves the possibility and effectiveness of the counter-cyclical debt policy. It will be much better to institutionalize these policies to avoid the moral hazards of governments and politicians, which, in a great sense, requires engaging and educating the public and, finally, obtaining support from them.