Blog Post

Budgeting for the next downturn

By: Jonathan Ball, Legislative Fiscal Analyst, and Jennifer L. Robinson, Associate Director, Kem C. Gardner Policy Institute

One lesson state budget inquisitors can learn from living through two recessions – including one labeled as “great” – is that it is never too soon to start planning for the next one.  This is not the result of strategic policy formulation, long-term planning, or some arcane academic theory – it’s simply for self-preservation.  Yet, a recent panel on budgeting at the Western Political Science Association, in which we participated with our colleagues from across the West, demonstrated that some states haven’t learned that lesson.

The business cycle is not dead.  According to data collected by the National Bureau of Economic Research, there were 11 business cycles between 1945 and 2009, when the current cycle began.  The average length of a business cycle expansion in the United States trough to peak is 58 months – a little less than five years.  The latest expansion began in June 2009 – making the current expansion eight years long.

The appropriate preparations for governments are not all that complex.  Know your exposure to risk by measuring the downside magnitude associated with certain negative economic events.  Estimate the probability of such an event.  Build appropriate contingencies for the events – including formal rainy day funds, of course, but perhaps more importantly diversifying revenu