A structural imbalance, or structural deficit, is present when the projected long term expenditures of a government exceed its projected long term revenues. A true structural deficit persists regardless of business cycle conditions. Though it may be temporarily masked by a boom in the business cycle, or exacerbated by recession, if left uncorrected, it is a condition that will lead to actual fiscal year deficits in long run.

This dissertation explores the measurement and impact of the concept of structural deficit in the state budgeting process. It consists of three papers. The first essay compares two uniform methods for projecting structural imbalance across states. The results indicate that neither the method developed by Hovey (1998b), nor the simplified method that is explored here, provide a reliable approximation of states' own long-term budget forecasts. Because they are based on a uniform set of assumptions, the two methods do permit a relatively objective comparison of the fiscal conditions in each state. However, these methods are not an appropriate source of data for evaluating state response to the forecasts developed by their own analysts.

The second study examines the reaction of state budget officials to the presence of structural deficit by examining the impact of projected structural imbalance on a state's fiscal impulse, a measure of discretionary budget change. This is the first time the Blanchard fiscal impulse measure has been applied at the sub-national level in the United States. Statistical evidence is found that a negative fiscal impulse is associated with state forecasts of structural deficit. This study provides evidence that long-term state forecasts may be influential in budget policy formulation.

The third paper also explores state reaction to structural imbalance, by comparing general fund balance forecasts to actual fiscal year outcomes for three states: California, Connecticut and Nebraska. This paper identifies patterns indicating that budget forecasts play a real role in shaping state budget policy. State forecasts align with outcomes in the majority of cases, but this alignment deteriorates with the length of the time horizon. Also, states are more likely to correct a predicted deficit that to reverse a surplus.