As explained in this short video, a spending cap limits how fast a government’s budget can grow each year.
That being said, not all spending caps are created equal. A fiscal rule that allows continuous increases in the burden of government spending is akin to an excessive speed limit on the road in front of an elementary school.
At a minimum, a spending cap should keep the spending burden constant (relative to the economy’s productive sector). Even better, a spending cap should fulfill the Golden Rule of fiscal policy by slowly but surely reducing the size of government.
Let’s learn from a real-world example.
Ben Wilterdink, a Visiting Fellow with the Alaska Policy Forum, explains for readers of the Peninsula Clarion that the state has a spending cap, but one that is set too high.
Alaska is in the midst of a perfect fiscal storm. …Even before the present crisis, our state faced large budget deficits and tough decisions about how to make ends meet. …That’s why adopting a functional limit on the growth in state spending is essential for long-term economic success. …a functional limit in the growth of state spending decreases the temptation to dramatically increase spending when economic times are good, creating new budget expectations that are difficult to maintain during inevitable economic downturns… Technically, Alaska already has a constitutional spending cap in place, but the formula used renders it basically meaningless. …While Alaskans can’t retroactively adopt a meaningful spending limit, we can ensure that those economic benefits are captured going forward.
So why is a spending cap now an important issue?
Because the state relies overwhelmingly on energy taxes, which are very cyclical, and the drop in oil prices is putting pressure on state finances.
This isn’t an overnight phenomenon. Here’s some of what Henry Olsen wrote last year for the Washington Post.
Alaskans have long financed their state government without paying for it themselves. Alaska has no personal income tax and no statewide sales or property tax. Instead, the state uses taxes and royalties on oil and gas producers to fund the overwhelming share of its government. …Alaska Gov. Mike Dunleavy (R) told his constituents that the gravy train is over. Oil prices and production have been down for many years… Dunleavy showed the leadership that many conservatives contend is lacking in Washington and proposed slashing state spending by nearly 25 percent. Those cuts are real, not some phony accounting scheme against “projected” spending. …Dunleavy’s budget is forcing Alaskans to decide how much government they want and how much they are willing to pay for it.
The bad news is that Alaskans may decide they want more government. Indeed, Olsen suggests in his column that this may be the outcome.
That might even lead politicians in the state to do something really unfortunate, such as adopting a state income tax.
I wrote about Alaska’s fiscal policy back in 2015 and shared a very depressing chart showing that the burden of state spending tripled in the eight-year period between 2005 and 2013.
Just imagine, though, if spending during that period only grew at the rate of population plus inflation. The state would be in a very strong fiscal position today instead of dealing with a big mess (that’s also the case for the federal government, which also deals with revenue fluctuations).
So what’s the bottom line? Here’s another excerpt from Wilterdink’s column, noting that Colorado’s spending cap is a good role model.
…the most effective is Colorado’s Taxpayer Bill of Rights (TABOR), which constitutionally limits spending growth to the rate of inflation plus estimated population growth. The stable budget and tax climate created by TABOR has served Coloradans remarkably well. Over the past decade, Colorado’s gross state product (GSP) has grown by 45.5%, personal income has grown by 59.5%, and non-farm payroll employment has grown by 15.8%.
Amen. Colorado’s TABOR policy is a common-sense policy with a strong track record. And Colorado voters, most recently last November, routinely reject proposals to bust the state’s spending cap. So it’s an economic success and a political success.
P.S. If Alaska (or any other jurisdiction) wants global examples of successful spending caps, Switzerland and Hong Kong are good role models.
Source: International Libery
Powered by WPeMatico