One essential question in state budgeting is, “Will the decisions elected leaders make today prove affordable tomorrow?” Although residents will always need government programs and services, such as schools, roads, prisons, and health insurance, budget imbalances can jeopardize governments’ ability to afford these programs and services.
States can use two analytical tools to gauge their risk of imbalances and promote greater budget sustainability: long-term budget assessments and budget stress tests. Long-term budget assessments project revenue and spending several years into the future to show whether states face structural budget deficits and, if so, why. Stress tests estimate the size of budget shortfalls that would result from recessions or other potential economic events and evaluate whether the state is prepared for these events.
The findings of these analyses can inform some of states’ most consequential budget decisions. For instance, if a state cuts taxes this year, will it still be able to afford its spending commitments in five or 10 years—or the next time a recession hits? If a state increases teacher pay, will it face budget shortfalls later? Together, stress tests and long-term budget assessments can help provide the answers.