Being a glass-half-full kind of guy, I look for kernels of good news when examining economic policy around the world. I once even managed to find something to praise about French tax policy. And I can assure you that’s not a very easy task.
I particularly try to find something positive to highlight when I’m a visitor. While in the Faroe Islands two days ago, for instance, I wrote about that jurisdiction’s new system of personal retirement accounts.
And now that I’m in Iceland, I want to focus on spending restraint.
As you can see from this chart, lawmakers in this island nation have done a reasonably good job of satisfying Mitchell Golden Rule over the past couple of years. Nominal economic output has been growing by 6.1 percent annually, while government spending has risen by an average of 2.8 percent per year.
If Iceland continues to enjoy this level of growth and can maintain this modest degree of fiscal discipline, the burden of government spending will soon drop below 40 percent of GDP.
As I’ve noted before, fiscal progress can occur very rapidly if spending is curtailed. Consider what’s happened, for example, over the past two years in America. Total federal spending didn’t grow in 2011 or 2012, and that de facto two-year spending freeze has led to a big reduction in the size of the public sector relative to GDP.
And because policymakers addressed the underlying disease of excessive spending, it’s no surprise that the symptom of red ink became much less of a problem with the deficit falling by almost 50 percent in those two years.
And nations such as New Zealand and Canada also have enjoyed quick benefits when limiting the growth of government.
Now let’s take a glass-half-empty look at Icelandic fiscal policy.
First, Iceland isn’t really moving in the right direction. Policy makers are merely undoing the damage that occurred in the latter part of last decade. As recently as 2006, the burden of government spending was less than 42 percent of GDP. So the current period of fiscal discipline is like going on a diet after spending several years at an all-you-can-eat dessert shop.
Second, three years of spending restraint could be a statistical blip rather than a long-run trend, especially since the 2014 numbers from the IMF are an estimate and the 2012 and 2013 numbers aren’t even finalized.
What Iceland needs is some sort of Swiss-style spending cap to impose long-run limits on the growth of government spending. As you can see from this second chart, Switzerland’s “debt brake” has produced more than ten years of spending restraint. Government generally has been growing slower than the private sector, which means that burden of government spending has been falling in Switzerland while other European nations are moving in the wrong direction.
By the way, it’s not just Iceland that would benefit from this type of spending cap. I explained last year that America would never have experienced trillion-dollar deficits if we had something similar to the Swiss debt brake.
Though it’s important not to overstate the benefits of this policy. A Swiss-type spending cap presumably wouldn’t have stopped the Fed’s easy-money policy. Nor would it have prevented Fannie-Mae and Freddie Mac from subsidizing a housing bubble. So we presumably still would have suffered a financial crisis.
But that’s not an argument against a spending cap. We lock our doors and latch our windows even though we realize that determined crooks can still break in. But at least we want to make our homes a less inviting target. Likewise, a spending cap doesn’t preclude all bad policies. But at least it makes it harder for politicians to increase spending.
The ultimate challenge, of course, is figuring out how to convince politicians to tie their own hands. The academic research suggests that spending caps need to be well designed if we want to limit the greed of the political class.
Iceland has made some progress, but Switzerland at this point is a better role model because the debt brake has been very durable.
P.S. If we’re going to copy Switzerland, we also should take a close look at their tax laws. Switzerland has the best ranking in the Tax Oppression Index, while the United States languishes in the bottom half of nations measured.
[…] of Switzerland’s decentralized economy and success of the debt brake, it is is the only nation from Europe or North America that gets high scores from Economic Freedom […]
[…] in 2013, I wrote about how modest spending restraint was helping to solve fiscal problems created by the financial […]
[…] data, total government spending “only” consumes 37.7 percent of America’s GDP. Only Ireland, Switzerland, and Latvia have better numbers (though my friend Constantin Gurdgiev explains we should be […]
[…] government spending “only” consumes 37.7 percent of America’s GDP. Only Ireland, Switzerland, and Latvia have better numbers (though my friend Constantin Gurdgiev explains we should be […]
[…] It has a spending cap, imposed in a landslide referendum early last decade, that has constrained the growth of government. […]
[…] called the “debt brake” and it has helped reduce the burden of government spending in Switzerland at a time when most nations in Europe have been moving in the wrong […]
[…] I have written favorably about the Penny Plan, but I normally promote the Swiss Debt Brake, which is a spending cap that has allowed government spending to grow each year by an average of 2 percent. […]
[…] I have written favorably about the Penny Plan, but I normally promote the Swiss Debt Brake, which is a spending cap that has allowed government spending to grow each year by an average of 2 percent. […]
[…] there was no direct mention of Switzerland’s very successful spending cap, even though the “debt brake” has generated superb […]
[…] there was no direct mention of Switzerland’s very successful spending cap, even though the “debt brake” has generated superb […]
[…] there was no direct mention of Switzerland’s very successful spending cap, even though the “debt brake” has generated superb […]
[…] happened with the Swiss Debt Brake (which is actually a spending cap), government spending has increased about 2 percent annually. That’s a frugal approach when the economy is growing and revenues are increasing, so […]
[…] happened with the Swiss Debt Brake (which is actually a spending cap), government spending has increased about 2 percent annually. That’s a frugal approach when the economy is growing and revenues are increasing, so […]
[…] to elaborate on the nations that have made responsible choices. I’ve already written about fiscal restraint in Switzerland, and I’ve also noted that the United Kingdom has moved in the right direction (even though […]
[…] such have Switzerland have shown how spending caps produce very positive […]
[…] in recent years, with a slight increase from 7.80 to 7.87 between 2010 and 2013. And Iceland also has been trying to improve. Its score has jumped from 6.43 to 6.87 over the past three […]
[…] you can see from the chart, Switzerland has enjoyed great success ever since voters imposed the debt […]
[…] only grown by 2.07 percent per year since the implementation of the debt brake (which is really a spending cap). So that’s actually the best role model in Europe, as explained here by a representative […]
[…] European nations have suffered downward spirals of more spending-more taxes-more debt. Here’s a chart I put together on what’s happened to spending in Switzerland ever since 85 percent of voters imposed the […]
[…] European nations have suffered downward spirals of more spending-more taxes-more debt. Here’s a chart I put together on what’s happened to spending in Switzerland ever since 85 percent of voters imposed the […]
[…] to a constitutional spending cap, Switzerland has shrunk the public sector, balanced its budget and reduced government […]
[…] to a spending cap, Switzerland has shrunk the public sector, balanced its budget and reduced government debt […]
[…] to a spending cap, Switzerland has shrunk the public sector, balanced its budget and reduced government debt […]
[…] the most important and beneficial real-world consequence, which I shared back in 2013, is that the burden of government spending has declined relative to the economy’s productive […]
[…] the most important and beneficial real-world consequence, which I shared back in 2013, is that the burden of government spending has declined relative to the economy’s productive […]
[…] the most important and beneficial real-world consequence, which I shared back in 2013, is that the burden of government spending has declined relative to the economy’s productive […]
[…] you can see from the chart, Switzerland has enjoyed great success ever since voters imposed the debt […]
[…] you can see from the chart, Switzerland has enjoyed great success ever since voters imposed the debt […]
[…] you can see from the chart, Switzerland has enjoyed great success ever since voters imposed the debt […]
[…] by real-world evidence, which is why I’ve used data from nations such as Germany, Japan, Switzerland, Canada, the United Kingdom, and the United States to show that bigger government generally hampers […]
[…] That policy, technically known as the debt brake, imposes a rolling cap on budgetary growth and has been very effective. Colorado also has a spending cap that has been somewhat effective in restraining the cost of the […]
[…] And that’s why Switzerland has enjoyed more than a decade of good policy. […]
[…] really a spending cap, and it’s worth noting that the Swiss budget has increased by only 2 percent per year since voters imposed the law back in […]
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“Don’t buy stuff you cannot afford.” ~SNL
[…] « Iceland, Switzerland, and the Golden Rule of Fiscal Policy […]
The debt break should include the incentive of a huge bonus (2x salary). After all, they work for us [they do??] and we should compensate them for meeting spending targets.
The glass is NEVER half empty or half full!
It is twice as large as it should be….:)