CAPITAL BUDGETS, BORROWING RULES, AND STATE-CAPITAL SPENDING

This paper compares the level and composition of government spending in U.S. states that maintain separate budgets for capital and operating expenditures with that in states that employ unified budgets. It also investigates the effects of pay-as-you-go financing rules for capital projects. The empirical findings suggest that states with separate capital budgets spend more on public capital projects than comparable states with unified budgets. There is no evidence that the presence or absence of a capital budget affects the level of non-capital spending. Pay-as-you-go requirements for financing capital projects are associated with lower levels of both capital and non-capital spending.