The impact of late budgets on state government borrowing costs

• We analyze the effect of late budgets on US states’ bond yield spreads.
• We estimate that a 30 day budget delay has a cumulative impact of around 10 bp.
• States with sufficient liquidity incur no costs from late budgets.
• Unified governments face large penalties from not finishing a budget on time.

We analyze how a key component of fiscal governance, the ability of governments to pass a budget on time, affects government bond yield spreads. Based on a sample of 36 US states from 1988 to 1997, and using an original data set on budget enactment dates, we estimate that a 30 day budget delay has a cumulative impact that is equivalent to a one-time increase in the yield spread of around 10 basis points. States with sufficient liquidity incur no costs from late budgets, while unified governments face large penalties from not finishing a budget on time.