Fiscal conservatism brought about deficit reduction in the rest of the Anglosphere, and it will work in the United States too, writes Sean Speer.
By Sean Speer, Dec. 11 2017
Tax reform has not only trumped action on the federal deficit and debt, it now even has former fiscal hawks such as Office of Management and Budget Director Mick Mulvaney claiming “we need new deficits.” It’s quite an intellectual about-face. It’s one thing to make a short-term political judgement about legislative priorities. It’s another to adopt left-wing arguments about the necessity of deficit spending. The case for sound public finances and limited government is invariably lost along the way.
The problem, of course, is not just that Mr. Mulvaney’s formulation is inconsistent, it’s also wrong. It wrongly assumes that all current spending is productive and efficient and that reducing the deficit will necessarily harm the economy.
It’s one thing to make a short-term political judgement about legislative priorities. It’s another to adopt left-wing arguments about the necessity of deficit spending.
This false case against spending reform or deficit reduction is hardly unique to him. There’s always an excuse. The timing is seemingly never right. The economy is too soft. Other tax and spending priorities are too important. And so on.
This is how Washington ends up recording a budgetary deficit 45 of the past 50 years and with a federal debt that amounts to $119,499 per household. Alan Simpson and Erskine Bowles, former heads of the bipartisan commission on fiscal responsibility and reform, have called it “deficit denial.”
The real-world experiences with fiscal reform across the Anglosphere show these arguments and concerns are unfounded. There’s no reason for denial. Well-designed spending reforms and deficit reduction can be associated with positive economic and social outcomes. Mr. Mulvaney and others in Washington would be wise to heed these lessons.
Australia, Canada, New Zealand, and the United Kingdom have each grappled with structural deficits and unsustainable public debt at different times over the past three decades. The similarities to the current U.S. situation are notable.
These countries fell into vicious patterns of deficit spending divorced from the business cycle. It didn’t matter if the economy was growing or slowing. More spending and higher deficits was always the policy response. Special interest calls for more spending always trumped deficit reduction. Warnings about so-called “austerity” always precluded spending cuts. Short-termism superseded long-term solutions. Debt continued to pile up. Their public finances ultimately became unsustainable.
Where these Anglosphere countries diverge is they actually did something about it. Each eventually undertook ambitious fiscal reforms to control spending, cut budget deficits, and reduce or stabilize government debt. The experiences were slightly different. Some were led by center-left governments. Others were led by conservatives. Some involved broader market reforms. Others were more limited to public finances.
The commonalities of these Anglosphere experiences, though, are where Mr. Mulvaney can derive some lessons. Greater public transparency helped people understand the magnitude of the problem and the need for a proportionate solution. Budgeting was rooted in conservative assumptions rather than accounting gimmicks. Clear fiscal rules and targets were established to hold the government accountable. Fiscal reforms were mostly comprised of spending reductions rather than tax hikes. And fiscal tightening was married to broader non-fiscal reforms (such as liberalizing protected sectors and eliminating corporate welfare) to boost growth, investment, and job creation.
But the most important commonality was the outcome. Anti-austerity warnings – many of which sound similar to claims heard now in Washington – failed to materialize. Quite the contrary. These experiences with fiscal reform were generally marked by positive economic and social outcomes including economic growth, investment, and job creation. Especially since the “fiscal dividend” resulting from deficit reduction enabled a raft of fiscally-neutral reforms such as lowering personal and corporate tax rates. The main takeaway is that well-designed fiscal reform can be part of a pro-growth, pro-opportunity agenda.
The lesson from the Anglosphere is that fiscal conservatism should be resuscitated in Washington.
It’s a message currently missing in Washington. Overblown warnings about so-called “fiscal drag” have apparently won the day. Deficit spending is now the fiscal norm irrespective of the circumstances or context. Even fiscal hawks have fallen for this form of bastardized Keynesianism. No wonder people wonder if “fiscal conservatism is dead.”
The lesson from the Anglosphere is that it should be resuscitated in Washington. The government doesn’t “need” more deficit spending. It’s had plenty of it for the past half-century. It also doesn’t need more excuses about the timing or other priorities. What is needed now is a serious plan to eliminate the budget deficit and stabilize Washington’s long-term finances. The conservative case for sound public finances and limited government ultimately depends on it.
Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute in Canada and editor of the essay compilation, The Case for Fiscal Reform: Lessons from the Anglosphere.