U.S. Needs Fiscal Rules to Tackle Rising National Debt

COMMENTARY Budget and Spending

U.S. Needs Fiscal Rules to Tackle Rising National Debt

Jan 16, 2019 3 min read
COMMENTARY BY

Former Director, Grover M. Hermann Center

Romina was a leading fiscal and economic expert at The Heritage Foundation and focused on government spending and the national debt.
What magic formula keeps the Swiss and Swedish fiscal houses in order? Tsvi Braverman / EyeEm/Getty Images

Key Takeaways

The U.S. national debt is closing in on $22 trillion — $68,000 for every man, woman, and child living here.

Fiscal rules are necessary to restrain the natural propensity of democracies to spend and borrow to excess.

It took a crisis to get Switzerland and Sweden to correct fiscal course. It may take the same to awaken the American people and their legislators.

The U.S. national debt is closing in on $22 trillion — $68,000 for every man, woman, and child living here.

While lawmakers seem content to bring a portion of the federal government to a halt over a $6 billion line item, few blink an eye over this year’s projected deficit of more than $1 trillion.

There is a better way.

Last year, I met with economists in Switzerland and Sweden to discover what makes their countries’ budget processes work.

Both countries suffered a severe fiscal crisis in the 1990s, with rising deficits fueling a vast accumulation of national debt. And both escaped fiscal collapse by adopting a better framework to manage how much they tax, spend and borrow.

Switzerland’s debt brake has been so successful that the government appointed a commission to review what to do with the budget surplus: pay down the debt even faster, spend it or cut taxes? The commission recommended letting Swiss taxpayers keep more of their own money — a wise suggestion, indeed.

Income tax cuts are expected in Sweden too, thanks to balanced budgets that have kept social welfare spending in check.

Swedish benefits don’t increase automatically as they do in the U.S., where they are indexed to wage growth or inflation. And notional accounts for the Sweden’s pension system (similar to our Social Security) have built-in triggers, which reduce the generosity of pension benefits to reflect actual contributions and secure fiscal solvency.

Sweden does not have open-ended entitlement programs that grow, regardless of available revenues. We shouldn’t, either.

What magic formula keeps the Swiss and Swedish fiscal houses in order?

In both cases, they adopted a comprehensive fiscal framework anchored by sensible fiscal targets and enforced by spending and tax limits. It allows them to live with prevailing economic cycles by pegging federal spending and debt to GDP — spending more when the economy is down, and less when growth is strong — and establishing a process for living within those goals.

In two words: fiscal rules.

Politicians are prone to overspend and exaggerate the benefits without accounting for the inevitable trade-offs involved. Taxpayers, too, suffer at times from fiscal illusion. While not paying the full cost of government they already have, they demand even more — so long as they don’t have to pay for it. Hence, they countenance prodigal borrowing, assuming that someone else will bear the cost later.

Fiscal rules are necessary to restrain the natural propensity of democracies to spend and borrow to excess.

In America, the fiscal framework suffers from several shortcomings.

The U.S. has no constitutional provision to guide fiscal decision-making. The Constitution puts Congress firmly at the center of spending, taxing, and borrowing decisions but the founding document is silent concerning fiscal sustainability or budget balance.

Also lacking are comprehensive fiscal targets to guide the U.S. budget process. Theoretically, the process dictates that Congress set spending and revenue targets in the annual budget resolution. In practice, Congress rarely agrees on a budget resolution — and so federal spending continues nearly unabated.

Beyond that, the budget process is so convoluted and complex that few inside and outside of Congress have a solid understanding of how the process works. A lack of transparency and simplicity facilitates irresponsible spending, since constituents have difficulty assigning blame for fiscal failures and holding legislators accountable.

It took a crisis to get Switzerland and Sweden to correct fiscal course. It may take the same to awaken the American people and their legislators. And that crisis may just be at our doorstep.

With a $22 trillion debt fast approaching, lawmakers should act with resolution to adopt a transparent, sustainable fiscal framework that rests on popular support, reflects a bipartisan commitment, is based on fiscal targets that adjust with the business cycle, and allows a responsible emergency response.

By adopting a shared fiscal goal and a corresponding political commitment, U.S. legislators can control growth in spending and the debt before it is too late.

America’s fiscal future depends on it.

This piece originally appeared in The Washington Times