National governments routinely run deficits while state governments generally cannot. The difference is legal and it produces very different behaviour during a downturn.
The requirement is written into state law
Most states operate under a constitutional or statutory rule requiring the enacted budget to balance, and in some cases requiring the year to end in balance as well.
These provisions were largely adopted after nineteenth-century episodes in which states borrowed heavily for infrastructure and defaulted, damaging their ability to borrow for decades afterwards.
The rules typically apply to the operating budget rather than to capital projects, which may still be financed with long-term bonds against a dedicated revenue stream.
Currency is the underlying reason
A national government issuing debt in its own currency faces a different constraint from a state, which uses a currency it does not control and cannot create.
A state must therefore obtain every dollar it spends from taxes, fees or borrowing that lenders are willing to extend at a price it can afford.
Revenue falls exactly when needs rise
Income and sales tax receipts drop during a recession while demand for health coverage, unemployment administration and social services increases at the same moment.
The balance requirement forces states to close that gap by cutting spending or raising taxes, both of which reduce demand further and deepen the local downturn.
Economists describe this as procyclical fiscal policy, and it is the main reason national transfers to states become a central issue in every recession.
Reserve funds are the intended remedy
Many states maintain stabilisation funds built up during expansions and drawn down in contractions, which converts a rigid annual rule into something closer to a multi-year one.
Their effectiveness depends on deposit rules being automatic, since discretionary saving competes with immediate spending demands and tends to lose.
Accounting flexibility absorbs some pressure
Balance requirements apply to defined categories, so states can shift payment dates across the fiscal year boundary, defer pension contributions or move costs to local government.
These manoeuvres satisfy the letter of the rule while postponing the underlying imbalance, which is why the gap between a balanced budget and a sustainable one can be substantial.
Rating agencies and state auditors track the difference closely, and repeated use of timing devices tends to appear in a credit assessment before it appears in political debate.