Academic journal article Journal of Agricultural and Applied Economics

Fiscal Trends: Implications for the Rural South

Academic journal article Journal of Agricultural and Applied Economics

Fiscal Trends: Implications for the Rural South

Article excerpt

Key demographic trends in the rural South over the next decade-the aging of the population as baby boomers enter retirement, continued migration to the South, and rapid increases in shares of Hispanic residents-may have profound consequences for the financing of rural community public services. In this paper, we provide an overview of demographic and economic trends that are expected to influence the ability of rural communities to provide essential public services. In addition, we provide econometric evidence on the impacts that these trends are likely to have on the financing of K-12 education in South Carolina.

Key Words: demographic trends, fiscal trends, government services, rural South

Mitch Daniels, Office of Manangement and Budget (OMB) Director, expects federal budget deficits to expand from current levels to about 3% of gross domestic product (GDP)-about $300 billion over the next 2 years (New York Times).1 Others, like Paul Krugman, not only expect deficits to persist over the next decade but risk exploding to 4% or more of GDP after the baby boomers start retiring.2 States face both cyclical and structural problems (rising demands for education spending, soaring Medicaid budgets, etc.) that will make a return to budget surpluses at the state level highly unlikely over the next several years (e.g., Rivlin).

Headlines trumpeting federal and state fiscal problems are commonplace across the nation. In this paper, our first objective is to take stock of federal and state fiscal trends and to examine how they are likely to affect the fiscal condition of rural counties in the South. Since dramatic demographic shifts are also on the horizon that may exacerbate the fiscal challenges facing local governments, our second objective is to examine demographic trends in the South and to assess the role they will play in the evolving fiscal condition of rural counties. The third objective of the paper is to assess econometric evidence on the impacts that these trends are likely to have on the ability of government in one state to provide K-12 education services to their rural constituents.

The paper is organized as follows. A brief introduction to a framework for understanding the determinants of local fiscal burdens is presented in part II. In part III, we focus on demographic changes expected in the rural South as baby boomers enter retirement and the racial and Hispanic makeup of the population continues to evolve. Since federal and state transfers to county3 government play a key role in determining the extent of local fiscal burdens, we then examine trends in federal and state budgets in the South to identify critical issues confronting rural fiscal health in the South over the next decade in part IV. In part V, we take a careful look, in one state, at the likely impacts of the demographic, federal, and state fiscal trends on the fiscal condition of the most important (as a share of budget) local government service-public K-12 education.

A Framework for Understanding the Determinants of Local Fiscal Burdens

It is given that the impacts of the aging of the population-especially the baby boomers-will be dramatic on financing Social Security, Medicare, and Medicaid. Southern states with substantial shares of the rural poor and large numbers of retirees may be especially concerned with how to finance their share of Medicaid expenses A second critical issue facing rural areas is how demographic trends will affect the demand for and willingness to support local government services-especially public education (K-12).

MaCurdy and Nechyba (MN) provide a framework that illustrates how demographic change is likely to affect the local government "fiscal burden." This framework links demographic characteristics at the local (county) level to local government spending and the composition of revenues between local sources and intergovernmental transfers. The framework allows predictions of what will happen to spending per capita (and shares of spending) across broad categories of local government functions as a county population changes its shares of old, "working-age," and young over time. …

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