The most important goal of fiscal policy should be a small burden of government, and I explain in this video that you achieve that goal by restraining the growth of spending.
Small government is good for prosperity since it means politicians are not diverting as many resources from the productive sector of the economy.
Spending restraint is also like the Swiss army knife of fiscal policy in that it reduces the likelihood of other bad outcomes.
- If you don’t want politicians to threaten the economy with higher taxes, control spending.
- If you don’t want big deficits that cause capital to be misallocated, control spending.
- If you don’t want the central bank to have an incentive to create inflation, control spending.
Now lets look at a very practical example of why spending restraint is a good idea. The Congressional Budget Office just released its latest 10-year estimate.
Many people have looked at those numbers and expressed alarm about $2 trillion-plus deficits.
That’s bad news, but I’m more worried about the underlying problem of excessive government. The federal budget is now consuming more than 23 percent of America’s economic output and that fiscal burden is projected to expand over the next 10 years.
What’s the best way of dealing with this problem?
The simple answer is spending restraint. A hard spending freeze (like we had during the Tea Party era of 2009-2014) would balance the budget by about 2032. Even better, it would reduce the spending burden to about 18 percent of GDP.
Even if spending grows by 1 percent annually, the budget is balanced by early next decade (and, more importantly, the spending burden declines).
There are two more things to learn from this chart.
- First, there is not a problem of inadequate revenue. As you can see revenues are projected to grow rapidly over the next 10 years. Extending the Trump tax cuts would cause the green line to be a bit lower, but revenues would still be climbing. The bottom line is that America’s fiscal problem is entirely the result of excessive spending.
- Second, when I looked at CBO’s 10-year forecast in January of 2017, it was possible to balance the budget in 10 years simply by holding spending growth to 2.63 percent annually. Thanks to the past eight years of Trump/Biden profligacy, fiscal balance now requires that spending only grow 1.33 percent annually.
The bottom line, as I stated at the start of the video, is that good tax policy is impossible in the long run without good spending policy.
A spending cap is needed, but I’m not holding my breath for it to happen.
P.S. Previous editions of Republican budget games can be found here, here, and here.
