Business cycles and state governmental finances: Implications for higher education

The national economy has been increasingly subject to macroeconomic fluctuations in the 1970s. This paper demonstrates that these fluctuations have an important impact on state public finance. Tax revenues for these governments are directly related to the aggregate level of economic activity. However, the uncontrollability of such expenditure components as welfare, and the inflationary pressures in all program areas may increase expenditure levels in the face of declining revenue.Since public institutions of higher education rely heavily on financial support from state governments, the cyclical budgetary conditions of these governments have important implications for higher education. Historically, a financial crunch in higher education has resulted in most program areas being restricted to a similar extent, which reflects the fact that administrators have not adjusted expenditure levels to effectively deal with cyclical financial problems. This paper documents the severity of cyclical fluctuations in higher education finance and suggests ways to cope with these problems.