Maximizing America’s Prosperity

Lessons on Fiscal Rules from Other Developed Countries and U.S. States

Jun 21 2011

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Spend Less, Owe Less, Grow the Economy

The Joint Economic Committee (JEC) Republican Staff Commentary Spend Less, Owe Less, Grow the Economy reviewed the economic evidence about fiscal consolidation programs (i.e., programs to reduce government budget deficits and stabilize government debt as a percentage of Gross Domestic Product (GDP)) in developed countries – our economic competitors – since 1970.  Spend Less, Owe Less, Grow the Economy demonstrates that fiscal consolidations based entirely or predominately on government spending reductions are more successful in achieving their goals of reducing government budget deficits and stabilizing government debt as a percentage of GDP than fiscal consolidations in which tax increases play a significant role.  Spend Less, Owe Less, Grow the Economy also demonstrates that fiscal consolidations based entirely or predominately on government spending reductions, in addition to laying the ground work for long-term economic growth, are likely to provide a significant short-term boost to economic growth.  This JEC Republican Staff Commentary follows up by identifying the kinds of fiscal rules that would enable Congress to reduce federal spending, return to a fiscally prudent budget, and boost economic growth.

 

Highlights


♦   A balanced-budget amendment to the U.S. Constitution is unlikely to counteract the bias toward higher federal spending unless it is combined with explicit spending limitations.

♦   Constitutional balanced-budget provisions are not self-executing and must be supplemented by other statutory fiscal rules.

♦   Government spending caps expressed as a percentage of GDP have been successful in countries that have undergone fiscal consolidations.

♦   The U.S. government needs a statutory spending cap with a credible enforcement mechanism regardless of whether a constitutional balanced-budget amendment is ratified. 

♦   The item-reduction veto has reduced the growth of spending in U.S. states by strengthening the role of the governor relative to the legislature in making spending decisions.

♦   Sunset provisions have been effective by eliminating inefficient and unnecessary programs and agencies in U.S. states.

♦  The effectiveness of tax and expenditure limitations in U.S. states has varied greatly based on their design.

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