Can State and Local Governments in the US Run Fiscal Deficits?

Unlike the U.S. federal government, which can run fiscal deficits and issue treasury securities, most state and local governments face legal or constitutional limits on deficit spending. While technically allowed, these governments are often bound by balanced budget requirements that restrict their ability to spend beyond their revenues.

According to the National Conference of State Legislatures, nearly every state has some form of balanced budget rule. For example:

• Vermont is the only state with no formal requirement
• Wyoming, North Dakota, and Alaska have ambiguous or loosely interpreted rules
• Many states enforce limits through constitutional debt caps or annual spending constraints

Balanced budget rules typically fall into three categories:

• The governor must propose a balanced budget
• The legislature must pass a balanced budget
• Deficits cannot carry over into the next fiscal year

Unlike the federal government, states cannot freely issue debt without legislative approval or voter consent. This constraint, combined with political accountability, limits their ability to use deficit spending as a tool to stimulate aggregate demand.

During economic downturns, many state and local governments rely on federal aid to bridge budget gaps and support essential services highlighting a key macroeconomic handicap in decentralized fiscal systems.