Archive for the ‘Balanced Budget’ Category

Earlier this month, Americans for Prosperity held a “Road to Reform” event in Las Vegas.

I got to be the warm-up speaker and made two simple points.

First, we made a lot of fiscal progress between 2009 and 2014 because various battles over debt limits, shutdowns, and sequestration actually did result in real spending discipline.

Second, I used January’s 10-year forecast from the Congressional Budget Office to explain how easy it would be to balance the budget with a modest amount of future spending restraint.

Here’s my speech (you can see the entire event by clicking here).

I realize I sound uncharacteristically optimistic in these remarks, but it is amazing how easy it is to make progress with even semi-effective limits on the growth of government.

Genuine spending cuts would be very desirable, of course, but we move in the right direction so long as government spending grows slower than the private sector.

The challenge, needless to say, is convincing politicians to limit spending.

Well, we now have some new data in that battle. The CBO released its Update this morning, which means the numbers I shared in Nevada are now slightly out of date and that I need to re-do all my calculations based on the new 10-year forecast.

But it doesn’t really make a difference.  As you can see from the chart, we can balance the budget by 2021 if spending is capped so that it grows by 2 percent annually. And even if spending is allowed to grow by 3 percent per year (about 50 percent faster than projected inflation), the budget is balanced by 2024.

At this point, I feel compelled to point out that the goal should be smaller government, not fiscal balance.

But since fiscal policy debates tend to focus on how to eliminate red ink and balance the budget, I may as well take advantage of this misplaced focus to push a policy (spending restraint) that would be desirable even if we had a budget surplus.

And that’s the purpose of this video I narrated for the Center for Freedom and Prosperity back in 2010. The numbers obviously have changed over the past five years, but the underlying argument about the merits and efficacy of spending restraint are exactly the same today.

For more information on the merits of smaller government, here’s my tutorial on government spending.

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As far as I’m concerned, a key gateway test of whether someone might be a libertarian is whether they get upset when ordinary people are mistreated or brutalized by government.

Though admittedly any decent person should get upset by those examples.

So perhaps we need something more detailed to identify supporters of limited government, individual freedom, and personal responsibility. So when one of my friends sent me the “definitive political orientation test,” I immediately was tempted to see my score.

I don’t know if it’s the “definitive” test, but it seems reasonably accurate. As you can see, I’m about as libertarian as you can be without being an anarchist who wants zero government.

Though I should point out that there aren’t any questions on anarchism. I think the test probably assumes anarchism if your answers are both anti-welfare state and anti-defense.

This “circle test” is probably a simpler way of determining where you are on the big government-some government-no government spectrum.

But the most more sophisticated measure of libertarianism is Professor Bryan Caplan’s test. I only got a 94 out of a possible 160, which sounds bad, but that was still enough for my views to be considered “hard-core.”

And since we’re looking at online surveys, here are my results from the “I Side With” quiz. I don’t endorse candidates (as if anyone would care), but this quiz suggests that Rand Paul is closest to my views, followed by Scott Walker and Marco Rubio.

For what it’s worth, I’m not exactly shocked to see Hillary Clinton and Bernie Sanders at the bottom.

By the way, since we’ve shifted to a discussion of the 2016 race, I was the warm-up speaker for Governor Jeb Bush at a recent “Road to Reform” event in New Hampshire sponsored by Americans for Prosperity. Here’s what I said about fixing the budget mess in Washington.

You can watch the entire event and also see what the governor said by clicking here.

And for folks in Nevada, I’ll be the warm-up speaker for a similar event with Ted Cruz on August 14.

P.S. The most inaccurate political quiz was the one that classified me as a “moderate” with “few strong opinions.”

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When I first came to Washington back in the 1980s, there was near-universal support and enthusiasm for a balanced budget amendment among advocates of limited government.

The support is still there, I’m guessing, but the enthusiasm is not nearly as intense.

There are three reasons for this drop.

  1. Political reality – There is zero chance that a balanced budget amendment would get the necessary two-thirds vote in both the House and Senate. And if that happened, by some miracle, it’s highly unlikely that it would get the necessary support for ratification in three-fourths of state legislatures.
  2. Unfavorable evidence from the statesAccording to the National Conference of State Legislatures, every state other than Vermont has some sort of balanced budget requirement. Yet those rules don’t prevent states like California, Illinois, Connecticut, and New York from adopting bad fiscal policy.
  3. Favorable evidence for the alternative approach of spending restraint – While balanced budget rules don’t seem to work very well, policies that explicitly restrain spending work very well. The data from Switzerland, Hong Kong, and Colorado is particularly persuasive.

Advocates of a balanced budget amendment have some good responses to these points. They explain that it’s right to push good policy, regardless of the political situation. Since I’m a strong advocate for a flat tax even though it isn’t likely to happen, I can’t argue with this logic.

Regarding the last two points, advocates explain that older versions of a balanced budget requirement simply required a supermajority for more debt, but newer versions also include a supermajority requirement to raise taxes. This means – at least indirectly – that the amendment actually is a vehicle for spending restraint.

This doesn’t solve the political challenge, but it’s why advocates of limited government need to be completely unified in favor of tax-limitation language in a balanced budget amendment. And they may want to consider being more explicit that the real goal is to restrain spending so that government grows slower than the productive sector of the economy.

Interestingly, even the International Monetary Fund (which is normally a source of bad analysis) understands that spending limits work better than rules that focus on deficits and debt.

Here are some of the findings from a new IMF study that looks at the dismal performance of the European Union’s Stability and Growth Pact. The SGP supposedly limited deficits to 3 percent of GDP and debt to 60 percent of GDP, but the requirement failed largely because politicians couldn’t resist the temptation to spend more in years when revenue grew rapidly.

An analysis of stability programs during 1999–2007 suggests that actual expenditure growth in euro area countries often exceeded the planned pace, in particular when there were unanticipated revenue increases. Countries were simply unable to save the extra revenues and build up fiscal buffers. …This reveals an important asymmetry: governments were often unable to preserve revenue windfalls and faced difficulties in restraining their expenditure in response to revenue shortfalls when consolidation was needed. …The 3 percent of GDP nominal deficit ceiling did not prevent countries from spending their revenue windfalls in the mid-2000s. … Under the SGP, noncompliance has been the rule rather than the exception. …The drawbacks of the nominal deficit ceiling are particularly apparent when the economy is booming, as it is compatible with very large structural deficits.

The good news is that the SGP has been modified and now (at least theoretically) requires spending restraint.

The initial Pact only included three supranational rules… As of 2014, fiscal aggregates are tied by an intricate set of constraints…government spending (net of new revenue measures) is constrained to grow in line with trend GDP. …the expenditure growth ceiling may seem the most appealing. This indicator is tractable (directly constraining the budget), easy to communicate to the public, and conceptually sound… Based on simulations, Debrun and others (2008) show that an expenditure growth rule with a debt feedback ensures a better convergence towards the debt objective, while allowing greater flexibility in response to shocks. IMF (2012) demonstrates the good performance of the expenditure growth ceiling

This modified system presumably will lead to better (or less worse) policy in the future, though it’s unclear whether various nations will abide by the new EU rules.

One problem is that the overall system of fiscal rules has become rather complicated, as illustrated by this image from the IMF study.

Which brings us back to the third point above. If the goal is to restrain spending (and it should be), then why set up a complicated system that first and foremost is focused on red ink?

That’s why the Swiss Debt Brake is the right model for how to get spending under control. And this video explains why the objective should be spending restraint rather than deficit reduction.

And for those who fixate on red ink, it’s worth noting that if you deal with the underlying disease of too much government, you quickly solve the symptom of deficits.

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It’s amazingly simple to reduce the burden of government spending. Policy makers simply need to impose some modest spending restraint so that government doesn’t grow faster than the economy’s productive sector.

In a display of humility that can only be found in Washington, DC, I call this Mitchell’s Golden Rule.

And, amazingly, even the International Monetary Fund agrees that spending caps are the most effective strategy for good fiscal policy.

Since I’m not a fan of the IMF, this is definitely a case of strange bedfellows!

Let’s look at some case studies of what happens when there are limits on the growth of government.

A review of data for 16 nations reveals that multi-year periods of spending restraint lead to lower fiscal burdens and less red ink.

Between 2009 and 2014, a de facto spending freeze at the federal level dramatically reduced burden of spending in the United States.

Thanks to a spending cap, Switzerland has shrunk the public sector, balanced its budget and reduced government debt .

These real-world examples provide compelling evidence on the value of long-run spending restraint.

By the way, when I challenge my leftist friends to provide similar examples of nations that have achieved good results by raising taxes, they become uncharacteristically quiet. Just like you can hear crickets chirping when I present them with my two-question challenge to identify statist nations that are good role models.

But I’m digressing. Let’s get back to the main topic.

In addition to the data cited above, there are also hypothetical examples showing why it is important to have government grow slower than the private sector.

A column published by Investor’s Business Daily reveals that the United States would have avoided the multi-trillion dollar deficits of the Obama years had a Swiss-style spending cap been in effect.

The oil-rich Canadian province of Alberta would have avoided its current fiscal crisis had it followed my Golden Rule over the past 10 years.

Now let’s add to our list of hypothetical examples. Writing for Real Clear Markets, Professor Jeffrey Dorfman of the University of Georgia cleverly suggests that Republicans simply take Bill Clinton’s last budget and then adjust it for inflation and population growth.

…a Clinton is ready to show them a path to nearly everything a dream Republican budget might have. …President Bill Clinton’s last budget was for fiscal year 2001, which began just before the 2000 election. That budget spent $1.86 trillion, less than half of what President Obama is proposing. If this final Clinton budget is adjusted upwards for subsequent inflation (32 percent) and population growth (12 percent), we arrive at a figure of $2.76 trillion, still only 69 percent as much as President Obama wants to spend. This difference is what Republicans should exploit.

And since federal revenues for next year are projected to be $3.46 trillion, that means not only a smaller burden of government spending, but also a huge budget surplus.

Professor Dorfman then proposes that this gives Republicans leeway to show that they can compromise.

… appropriate spending for each agency equal to a minimum of the population and inflation adjusted amount in President Bill Clinton’s final budget plus 50 percent of the additional growth between President Obama’s proposal and the adjusted Clinton budget. That is, Republicans would not even try to roll federal spending back to when we last had a balanced budget, but only move to reverse half of the enormous spending increases that have occurred under Presidents George W. Bush and Barack Obama. Such a budget would spend $3.25 trillion and would come with an estimated budget surplus of $220 billion based on the latest Congressional Budget Office projections of 2016 federal revenue.

Dorfman hypothesizes that this rhetorical approach will give advocates of smaller government the upper hand.

After all, the statists presumably wouldn’t want to say Bill Clinton’s last budget was somehow draconian or heartless. And if Republicans are proposing to take that Clinton budget, adjust it for inflation and population, and then add even more money, it should be equally improbably to characterize their proposals as being draconian and heartless.

At a time when Hillary Clinton certainly appears set to run for president, Republicans can stake their claim to reduced spending in many areas by pointing out that they are being 50 percent more generous in inflation and population adjusted spending than President Clinton was. Will Democrats in Congress, or even President Obama, want to claim that President Clinton was insufficiently generous with the poor and working classes? Will they really want to take a stand in opposition to the Clintons at this point in time? I doubt it. Certainly Hillary Clinton is unlikely to want to criticize a Clinton budget. That will make other Democrats hesitate and likely bite their tongues. Using the Clintons against the rest of the Democrats offers the Republicans in Congress a clear path to almost all their budgetary wishes.

I agree that this is an astute strategy. I particularly like it because it puts the focus on how much government has grown since Bill Clinton left office.

And the notion of letting the budget grow as fast as population plus inflation is very similar to Colorado’s Taxpayer Bill of Rights, which is the best spending cap in America.

That being said, I’m far less optimistic than Professor Dorfman that this approach will produce a victory in the short run. Simply stated, President Obama is too ideologically committed to big government. Moreover, I doubt that he will feel any special pressure to accept Bill Clinton’s last budget as some sort of baseline.

But having this debate would still be useful and could pay dividends in 2017 and beyond.

P.S. Speaking of President Obama, let’s close with some political humor that showed up in my inbox yesterday.

P.S. If you want more Obama humor, check out this t-shirt, this Pennsylvania joke, this Reagan-Obama comparison, this Wyoming joke, this Bush-Obama comparison, this video satire, this bumper sticker, and this very timely bit of Bowe Bergdahl humor.

And sometime there’s even humor that makes me sympathize with the President.

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Last week, I applauded the Chairmen of the House and Senate Budget Committees for proposing budgets that complied with my Golden Rule, which means the burden of government would grow slower than the private sector.

But my praise was limited because neither budget is ideal from the perspective of libertarians and small-government conservatives.

Even though the two proposals satisfy my Golden Rule, that’s simply a minimum threshold. In reality, there’s far too much spending in both plans, and neither Chairman proposes to get rid of a single Department. Not HUD, not Education, not Transportation, and not Agriculture.

Heck, the budgets don’t even go after low-hanging fruit such as the Small Business Administration, National Endowment for the Arts, Corporation for Public Broadcasting, or Legal Services Corporation.

And it turns out that there’s another reason to be semi-disappointed with the GOP budgets.

Stephen Ohlemacher of the Associated Press has a story on the Republican plans and he looks at one of the GOP’s most prominent claims.

The new House and Senate Republican budgets make a big boast: They both balance the federal budget within 10 years, without raising taxes.

But there are two problems with this assertion.

First, the GOPers are assuming that certain “temporary” tax breaks will expire. And this means more money for the government.

…millions of American families and businesses would have to pay more in taxes to make the math work…current law assumes that more than 50 temporary tax breaks that expired at the start of the year will not be renewed. …All together, the tax breaks add up to $898 billion over the next decade, according to CBO. …Most Republicans in Congress have voted numerous times to temporarily extend them. And over the past year, the Republican-controlled House has voted to make some of the more popular ones permanent.

Second, Republicans say they want to repeal Obamacare, but they want to keep all the revenue currently associated with the Obamacare tax hikes.

…they rely on more than $1 trillion in tax revenue from the health law that would supposedly be repealed. …In 2012, CBO said repealing the president’s health law would reduce tax revenues by $1 trillion over the following decade. That number has certainly gone up as more of the law’s tax increases have come into effect. But despite calling for the health law to be repealed, both budget resolutions include all the revenue that would come from the law’s taxes.

Both of these criticisms are valid.

Regardless of what you think about temporary tax provisions (some of them are good and some are special interest junk), letting these “extenders” expire is a way to boost the long-run revenue haul of the federal government. In an ideal world, by contrast, the good provisions would be made permanent and the bad ones would be repealed and the money used to finance good tax changes.

Similarly, while Republicans say they want to repeal the specific Obamacare tax hikes, that they don’t plan on letting go of the money. Which is just a way of saying that they are letting Obamacare boost the long-run revenue stream going to Washington.

By the way, this doesn’t mean that the GOP budgets are bad compared to current law. It simply means that they could – and should – be better. Specifically, they could incorporate lower tax levels and lower spending levels.

Which brings me to the part of the AP article that rubs me the wrong way. The headline, at least the one picked by Business Insider, says that eliminating red ink without a higher tax burden is “probably not possible.” And the language in the report is similar.

Balancing the federal budget is hard. Doing it without more tax revenue is even harder.

So why am I irked by this passage? Well, balancing the budget without new money for DC may be “harder” in the sense that it would require more spending restraint. And someone might be correct if they predicted that achieving balance is “probably not possible” because politicians are reluctant to exercise fiscal discipline.

But that doesn’t mean it can’t be done.

Earlier this year, I shared this chart showing how modest spending restraint can quickly balance the budget. As you can see, it’s actually very simple to get rid of red ink if politicians simply exercise a modest bit of fiscal discipline.

But I’ll admit that I used the Congressional Budget Office’s January projections of revenue, which assumed (like the GOP budgets) that the government would get revenues from the Obamacare tax hikes, as well as revenues from expiring provisions.

So does that mean that it’s impractical to balance the budget without all this added money going to DC?


Let’s look at the numbers (and we now have new revenue projections from CBO, but they haven’t changed much) and see what happens if you remove the $2 trillion of revenues (over 10 years) associated with Obamacare and the extenders.

Since the revenue numbers climb over time, let’s assume that this means revenues will be $250 billion lower in 2025.

Does that cripple any hope of balancing the budget?

Hardly. It simply means that spending over the next 10 years could grow only about 2.7 percent per year rather than (as assumed in the House and Senate budgets) 3.3 percent per year.

So the bottom line is that we don’t need more revenue in Washington. We simply need more spending restraint.

P.S. By the way, this video explains why our goal should be smaller government, not fiscal balance.

That being said, there’s overwhelming evidence from nations all over the world that spending restraint is the best way to quickly reduce red ink.

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Earlier this year, President Obama proposed a budget that would impose new taxes and add a couple of trillion dollars to the burden of government spending over the next 10 years.

The Republican Chairmen of the House and Senate Budget Committees have now weighed in. You can read the details of the House proposal by clicking here and the Senate proposal by clicking here, but the two plans are broadly similar (though the Senate is a bit vaguer on how to implement spending restraint, as I wrote a couple of days ago).

So are any of these plans good, or at least acceptable? Do any of them satisfy my Golden Rule?

Here’s a chart showing what will happen to spending over the next 10 years, based on the House and Senate GOP plans, as well as the budget proposed by President Obama.

Keep in mind, as you look at these numbers, that economy is projected to expand, in nominal terms, by an average of about 4.3 percent annually.

The most relevant data is that the Republican Chairmen want spending to climb by about $1.4 trillion over the next decade (annual spending increases averaging about 3.3 percent per year), while Obama wants spending to jump by about $2.4 trillion over the same period (with annual spending climbing by an average of almost 5.1 percent per year).

At this point, some of you may be wondering how to reconcile this data with news stories you may have read about GOP budgets that supposedly include multi-trillion spending cuts?!?

The very fist sentence in a report from The Hill, for instance, asserted that the Senate budget would “cut spending by $5.1 trillion.” And USA Today had a story headlined, “House GOP budget cuts $5.5 trillion in spending.”

But these histrionic claims are based on dishonest math. The “cuts” only exist if you compare the GOP budget numbers to the “baseline,” which is basically an artificial estimate of how fast spending would grow if government was left on auto-pilot.

Which is sort of like a cad telling his wife that he reduced his misbehavior because he only added 4 new mistresses to his collection rather than the 5 that he wanted.

I explained this biased and deceptive budgetary scam in these John Stossel and Judge Napolitano interviews, and also nailed the New York Times for using this dishonest approach when reporting about sequestration.

Interestingly, the Senate plan tries to compensate for this budgetary bias by including a couple of charts that properly put the focus on year-to-year spending changes.

Here’s their chart on Obama’s profligate budget plan.

And here’s their chart looking at what happens to major spending categories based on the reforms in the Senate budget proposal.

So kudos to Chairman Enzi and his team for correctly trying to focus the discussion where it belongs.

By the way, in addition to a better use of rhetoric, the Senate GOP plan actually is more fiscally responsible than the House plan. Under Senator Enzi’s proposal, government spending would increase by an average of 3.25 percent per year over the next 10 years, which is better than Chairman Price’s plan, which would allow government spending to rise by an average of 3.36 percent annually.

Though both Chairman deserve applause for having more spending restraint than there was in the last two Ryan budgets.

But this doesn’t mean I’m entirely happy with the Republican fiscal plans.

Even though the two proposals satisfy my Golden Rule, that’s simply a minimum threshold. In reality, there’s far too much spending in both plans, and neither Chairman proposes to get rid of a single Department. Not HUD, not Education, not Transportation, and not Agriculture.

But the one thing that got me the most agitated is that the House and Senate proposals both indirectly embrace very bad economic analysis by the Congressional Budget Office.

Here’s some language that was included with the House plan (the Senate proposal has similar verbiage).

CBO’s analysis…estimates that reducing budget deficits, thereby bending the curve on debt levels, would be a net positive for economic growth. …The analysis concludes that deficit reduction creates long-term economic benefits because it increases the pool of national savings and boosts investment, thereby raising economic growth and job creation.

But here’s the giant problem. The CBO would say – and has said – the same thing about budget plans with giant tax increases.

To elaborate, CBO has a very bizarre view of how fiscal policy impacts the economy. The bureaucrats think that deficits are very important for long-run economic performance, while also believing that the overall burden of government spending and the punitive structure of the tax code are relatively unimportant.

And this leads them to make bizarre claims about tax increases being good for growth.

Moreover, the bureaucrats not only think deficits are the dominant driver of long-run growth, they also use Keynesian analysis when measuring the impact of fiscal policy on short-run growth. Just in case you think I’m exaggerating, or somehow mischaracterizing CBO’s position, check out page 12 of the Senate GOP plan and page 37 of the House GOP plan. You’ll see the “macroeconomic” effects of the plans cause higher deficits in 2016 and 2017, based on the silly theory that lower levels of government spending will harm short-run growth.

So hopefully you can understand why GOPers, for the sake of intellectual credibility, should not be citing bad analysis from the CBO.

But even more important, they should stop CBO from producing bad analysis is the future. The Republicans did recently replace a Democrat-appointed CBO Director, so it will be interesting to see whether their new appointee has a better understanding of how fiscal policy works.

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It’s not very often that I applaud research from the International Monetary Fund.

That international bureaucracy has a bad track record of pushing for tax hikes and other policies to augment the size and power of government (which shouldn’t surprise us since the IMF’s lavishly compensated bureaucrats owe their sinecures to government and it wouldn’t make sense for them to bite the hands that feed them).

But every so often a blind squirrel finds an acorn. And that’s a good analogy to keep in mind as we review a new IMF report on the efficacy of “expenditure rules.”

The study is very neutral in its language. It describes expenditure rules and then looks at their impact. But the conclusions, at least for those of us who want to constrain government, show that these policies are very valuable.

In effect, this study confirms the desirability of my Golden Rule! Which is not why I expect from IMF research, to put it mildly.

Here are some excerpts from the IMF’s new Working Paper on expenditure rules.

In practice, expenditure rules typically take the form of a cap on nominal or real spending growth over the medium term (Figure 1). Expenditure rules are currently in place in 23 countries (11 in advanced and 12 in emerging economies).

Such rules vary, of course, is their scope and effectiveness.

Many of them apply only to parts of the budget. In some cases, governments don’t follow through on their commitments. And in other cases, the rules only apply for a few years.

Out of the 31 expenditure rules that have been introduced since 1985, 10 have already been abandoned either because the country has never complied with the rule or because fiscal consolidation was so successful that the government did not want to be restricted by the rule in good economic times. … In six of the 10 cases, the country did not comply with the rule in the year before giving it up. …In some countries, there was the perception that expenditure rules fulfilled their purpose. Following successful consolidations in Belgium, Canada, and the United States in the 1990s, these countries did not see the need to follow their national expenditure rules anymore.

But even though expenditure limits are less than perfect, they’re still effective – in part because they correctly put the focus on the disease of government spending rather than symptom of red ink.

Countries have complied with expenditure rules for more than two-third of the time. …expenditure rules have a better compliance record than budget balance and debt rules. …The higher compliance rate with expenditure rules is consistent with the fact that these rules are easy to monitor and that they immediately map into an enforceable mechanism—the annual budget itself. Besides, expenditure rules are most directly connected to instruments that the policymakers effectively control. By contrast, the budget balance, and even more so public debt, is more exposed to shocks, both positive and negative, out of the government’s control.

One of the main advantages of a spending cap is that politicians can’t go on a spending binge when the economy is growing and generating a lot of tax revenue.

One of the desirable features of expenditure rules compared to other rules is that they are not only binding in bad but also in good economic times. The compliance rate in good economic times, defined as years with a negative change in the output gap, is at 72 percent almost the same as in bad economic times at 68 percent. In contrast to other fiscal rules, countries also have incentives to break an expenditure rule in periods of high economic growth with increasing spending pressures. … two design features are in particular associated with higher compliance rates. …compliance is higher if the government directly controls the expenditure target. …Specific ceilings have the best performance record.

And the most important result is that expenditure limits are associated with a lower burden of government spending.

The results illustrate that countries with expenditure rules, in addition to other rules, exhibit on average higher primary balances (Table 2). Similarly, countries with expenditure rules also exhibit lower primary spending. …The data provide some evidence of possible implications for government size and efficiency. Event studies illustrate that the introduction of expenditure rules is indeed followed by smaller governments both in advanced and emerging countries (Figure 11a).

Here’s the relevant chart from the study.

And it’s also worth noting that expenditure rules lead to greater efficiency in spending.

…the public investment efficiency index of DablaNorris and others (2012) is higher in countries that do have expenditure rules in place compared to those that do not (Figure 11b). This could be due to investment projects being prioritized more carefully relative to the case where there is no binding constraint on spending

Needless to say, these results confirm the research from the European Central Bank showing that nations with smaller public sectors are more efficient and competent, with Singapore being a very powerful example.

One rather puzzling aspect of the IMF report is that there was virtually no mention of Switzerland’s spending cap, which is a role model of success.

Perhaps the researchers got confused because the policy is called a “debt brake,” but the practical effect of the Swiss rule is that there are annual expenditures limits.

So to augment the IMF analysis, here are some excerpts from a report prepared by the Swiss Federal Finance Administration.

The Swiss “debt brake” or “debt containment rule”…combines the stabilizing properties of an expenditure rule (because of the cyclical adjustment) with the effective debt-controlling properties of a balanced budget rule. …The amount of annual federal government expenditures has a cap, which is calculated as a function of revenues and the position of the economy in the business cycle. It is thus aimed at keeping total federal government expenditures relatively independent of cyclical variations.

Here’s a chart from the report.

And here are some of the real-world results.

The debt-to-GDP ratio of the Swiss federal Government has decreased since the implementation of the debt brake in 2003. …In the past, economic booms tended to contribute to an increase in spending. …This has not been the case since the implementation of the fiscal rule, and budget surpluses have become commonplace. … The introduction of the debt brake has changed the budget process in such a way that the target for expenditures is defined at the beginning of the process, which must not exceed the ceiling provided by the fiscal rule. It has thus become a top-down process.

The most important part of this excerpt is that the debt brake prevented big spending increases during the “boom” years when the economy was generating lots of revenue.

In effect, the grey-colored area of the graph isn’t just an “ideal representation.” It actually happened in the real world.

Though 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 sector.

This is a big reason why Switzerland is in such strong shape compared to most of its European neighbors.

And such a policy in the United States would have prevented the trillion-dollar deficits of Obama’s first term.

By the way, if you want to know why deficit numbers have been lower in recent years, it’s because we actually have been following my Golden Rule for a few years.

So maybe it’s time to add the United States to this list of nations that have made progress with spending restraint.

But the real issue, as noted in the IMF research, is sustainability. Yes, it’s good to have a few years of spending discipline, but the real key is some sort of permanent spending cap.

Which is why advocates of fiscal responsibility should focus on expenditure limits rather than balanced budget requirements.

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