Do Balanced Budget Laws Matter in Recessions?

Abstract

Since the mid‐1990s, most Canadian provinces have enacted balanced budget laws (BBLs). Critics argue that these laws are empty political gestures that are ignored during economic slowdowns. We consider BBLs in the Canadian provinces from 1981 to 2013 and find that provinces with stronger rules had better deficit and debt records overall. Recessions make it more difficult to achieve positive outcomes, but we find no obvious difference between the effects of BBLs during normal economic conditions and “bad times.” We conclude with suggestions for how the design of BBLs could take better account of jurisdiction‐specific business cycles.