At $6 trillion, President Joe Biden’s first budget calls for an unprecedented level of federal spending. Republican members of Congress who criticize the president’s plan are understandably reminded by Democrats that the GOP did not do much to resist—and even contributed to—excessive government spending during President Donald Trump’s time in office. During those four years, rampant spending led to nearly $8 trillion in more federal debt, though this included pandemic-related funding approved with bipartisan support. Still, this represents a 40% jump in mortgaging the future of ourselves, our kids, and our grandkids. It’s time for responsible budgeting at every level of government.
Republicans in Washington don’t have much of a leg to stand on when it comes to criticizing the profligacy of congressional Democrats and the Biden administration. But Republicans in many state capitals across the country, however, do. That’s because Republican governors and lawmakers in several states are getting government spending under control by passing conservative budgets which remain below population growth plus inflation. North Carolina is among the most prominent examples of this phenomenon—but is not the only one.
Since Republicans took control of the North Carolina General Assembly for the first time in a century a decade ago, they have kept growth in state spending on a conservative budget trajectory that keeps government growth within the average taxpayer’s ability to fund it. Since 2013, North Carolina state spending has grown by an average of 2.24% annually, which is below the population growth plus inflation rate of 2.58%.
By keeping the rise in state spending below a conservative budget limit for so many years, North Carolina lawmakers have been able to return billions of dollars to taxpayers over the past decade while realizing repeated budget surpluses. The income tax rate reduction approved nearly a decade ago continues to pay dividends for taxpayers and it may soon be improved upon. North Carolina lawmakers — led by Republican Senators Paul Newton, Bill Rabon, and Warren Daniel — proposed new legislation in April, which was approved with bipartisan support in the North Carolina Senate on June 9, that would enact the next round of income tax rate reduction.
“We have large cash reserves and we have yet another budget surplus for the sixth and seventh years,” Senator Paul Newton, Finance Committee Co-Chairman, said at a May 25 press conference. “The Republican philosophy, when government takes too much money from the people, is to give it back in the form of tax relief. In our view, it’s never, never the government’s money, it’s the people’s money. So we are proposing yet another tax cut because we believe people spend their money better than government does.”
By continuing to pass conservative budgets, North Carolina lawmakers have made the Tar Heel State one where lawmakers are leading by example, demonstrating for federal lawmakers that government spending restraint is both achievable and politically advantageous. Other states where lawmakers are also passing conservative budgets include Tennessee, Texas, Florida, Montana, and Iowa.
In neighboring Tennessee, lawmakers needed to make sure their new budget, enacted earlier this spring, stayed below $42.8 billion so as to pass a conservative budget. The new state budget signed into law by Governor Bill Lee (R) spends a total of $42.6 billion. By only increasing the state budget by 2.08% year over year, Tennessee lawmakers, like their counterparts in North Carolina and other states, have made sure that state spending does not exceed the average taxpayer’s ability to pay for it, thereby mitigating the threat of future tax increases or budget adjustments.
Tennessee isn’t the only no-income-tax state where lawmakers are doing of good job of keeping government spending in check. Texas is also leading by example. Not only have Texas lawmakers once again approved a new conservative budget, they used the 2021 session to approve legislation, Senate Bill 1336, that will strengthen the state’s spending cap, ensuring fiscal responsibility for years to come. Likewise, a constitutional amendment introduced by North Carolina legislators in April, referred to as the Taxpayer Bill of Rights, if enacted, would implement a similar state spending limit in North Carolina.
North Carolina lawmakers are now working to enact a new conservative budget that provides further tax relief. Those who want to continue the sustainable budgeting of recent years received good news in early June as legislative leaders from both chambers of the General Assembly announced a consensus spending figure that, if the new budget does not exceed it, would have state spending continue to grow slower than the combined rate of population growth plus inflation. More recently, the North Carolina Senate unveiled its version of the budget, which, in addition to spending less than the figure agreed to with the House in early June, cuts the personal income tax rate from 5.25% to 3.99% while phasing out the corporate income tax by 2028. That budget was approved with a bipartisan, veto-proof majority in the North Carolina Senate on June 24.
“We are pleased to see that the fiscal restraint the General Assembly has shown over the last ten years will continue,” said Brian Balfour, senior vice president of research at the John Locke Foundation, a Raleigh-based think tank. “It’s a strategy we would like to see added to the state constitution in the Taxpayer Bill of Rights.”
Based on federal spending trends and the new proposals coming out of Congress, it may seem like no one in Washington is interested in reining in the growth of government spending and ballooning federal debt. Yet lawmakers in states across the country, including North Carolina, Tennessee, and Texas, the world’s ninth-largest economy, are showing that government spending can be brought under control. There needs to be more lawmakers willing to do so.
North Carolinians are fortunate to have leadership in the General Assembly with such courage and will, who are showing the nation what conservative budgeting looks like. In doing so, they are benefitting North Carolina taxpayers while providing a model for lawmakers in other states and in Washington to emulate.
Patrick Gleason is vice president of Americans for Tax Reform, a taxpayer advocacy organization founded in 1985 at the request of President Ronald Reagan, and is a senior fellow at the Beacon Center of Tennessee, a Nashville-based think tank. Vance Ginn, Ph.D., is chief economist at the Texas Public Policy Foundation based in Austin, Texas, and he is the former chief economist of the White House’s Office of Management and Budget during the Trump administration.
The document below is the lesson that I teach at TPPF and others on economics and the importance of institutions. Please provide feedback. Thanks!
Texas’s economy is improving after the destruction from the pandemic and forced business shutdowns. The opening of the economy on March 10, 2021, helped bring some normalcy as many return to work, excessive government restrictions cease, and civil society improves. This normalcy is supported by wins regarding fiscal and regulatory policy and paths to opportunity by the 87th Texas Legislature during the recently completed session, and more successes may be realized during the special session called by Governor Greg Abbott. A key initiative will be to promote more pro-growth policies that reduce spending, taxing, and regulating in order to increase prosperity and withstand Washington’s anti-growth policies.
Peanut butter and jelly. Fred Astaire and Ginger Rogers. Budget limits and budget cuts. Some things just pair perfectly together.
Here at the Texas Public Policy Foundation, I’m sometimes asked why my focus lately has been on budget limits—as seen in our Conservative Texas Budget (the model for which has been adopted by other states) and our Responsible American Budget. Both of these set hard maximum limits for what can be considered as conservative, “no government growth” budgets.
A state or national budget should grow less than the simple formula of population growth plus inflation. Beyond that, budget writers truly are increasing the size and scope of government, which crowds out the average American’s opportunities to prosper.
But why am I not talking more about budget cuts, I’ve been asked. I am! If I had my way, the federal budget would be about a quarter of its size. The actual budget proposal I worked on during my year at the White House (for FY 2021) proposed a record of $4.6 trillion in less national debt over a decade, made most of the Trump tax cuts permanent, and would have balanced the budget over time.
The truth is that budget limits and budget cuts aren’t mutually exclusive—they’re a perfect pairing. Budget limits tell budget writers, “This much, and no further.” Budget cuts are an opportunity for those writers to demonstrate real fiscal conservatism by reducing the size and scope of government.
And over time, budget limits will cut the budget as a share of the nation’s Gross Domestic Product (GDP), because the GDP tends to grow faster than population-plus-inflation.
At the national level, the U.S. budget picture would be much improved if the federal government had spent no more than population-plus-inflation since 2000. Instead of increasing our national debt by $16.2 trillion in that time, we would instead have seen a surplus of $2.6 trillion.
Budget cuts—which could have been achieved by, say, sticking with the welfare reforms enacted in 1996—would make that picture even brighter.
Here’s what we know: Irresponsible government spending damages the productive private sector through redistribution of resources, higher taxes, higher price inflation, and higher interest rates, reducing Americans’ real incomes, job opportunities, and prosperity.
Budget limits and budget cuts are both ways to attack government spending—from different directions. Both are useful; both are needed. Supporting budget limits doesn’t mean supporting more spending; limits and cuts can be embraced at the same time and for the same purpose—to allow more Americans the freedom to prosper.
This table provides a comparison of initial appropriations for the 2020-21 budget from the Legislative Budget Board’s (LBB) Fiscal Size-Up and for the 2022-23 budget as noted in the conference committee report for SB 1 General Appropriations Act. We compare the budget with the Foundation’s Conservative Texas Budget (CTB) limits based on on a 5% increase in population growth plus inflation.
We exclude from the 2020-21 budget the $8.3 billion in mostly federal funds for one-time Hurricane Harvey recovery expenses and the $5 billion in general revenue funds for a 7-cent tax rate compression of school district M&O property taxes in HB 3 from the 2019 session. Likewise, we exclude from the 2022-23 budget the $6.1 billion in general revenue funds to maintain last session’s property tax relief—which without this allocation would result in a 7-cent tax rate hike in those property taxes and likely more spending. And we will exclude one-time distributions of federal funds related to the pandemic. Not including these types of one-time funds is necessary for budget transparency and for not inappropriately inflating the baseline budget allowing excessive appropriations later. We also exclude the $410.2 million in all funds for Article X that Gov. Greg Abbott vetoed, and he will likely include in a special session.
The 2022-23 Texas budget is well below the CTB limits in state funds and all funds, and leaves $11.6 billion in the rainy day fund. Excluding the $6.1 billion to stop a massive property tax hike, general revenue funds decline by 3.1% and state funds are up by only 0.7%. Including it, state funds are about $725 million below the CTB. And all funds, which is the full footprint of the taxpayer’s burden to fund state government appropriations, is up 3% to $242 billion, which compared with population growth plus inflation is 2-percentage points lower and $4.8 billion less.
The growth of initial appropriations, on average, has now been well below the average taxpayer’s ability to pay for them over the last four budgets, which was directly after the Foundation created the CTB in 2015.
The Texas Legislature’s practice of fiscal restraint while meeting the needs of the state is good news for Texans. And much of the CTB was passed into statute as the Legislature strengthened the state’s spending limit by expanding the base to all general revenue funds and changed the growth limit to population growth times inflation while increasing the threshold to exceed it to a three-fifths majority in each chamber. After the Foundation has worked toward this statutory change for multiple sessions, this is a huge feat that will have long-lasting benefits to Texans.
We encourage Gov. Greg Abbott to build on these policy wins and more by providing paths for more fiscal gains—such as substantial property tax reductions and improved local revenue limitations—in a special session.
Full article with figures.
Price inflation in May 2021 was up 5% over May of 2020. At this pace, the general level of prices will double in less than 15 years. The last time inflation was running this high was in 2008, when gasoline first breached $4 a gallon. And inflation expectations for the next year have reached a record high.
But what did we expect when the government created trillions of dollars and forced people to stay home from work? The Federal Reserve’s balance sheet has exploded by 100% to more than $8 trillion since last year; it was the perfect recipe for inflation with more money supplied than goods and services available to buy.
There have been red flags for months, with businesses announcing that they are raising prices.
Proctor & Gamble manufactures hundreds of products across dozens of brands from diapers to detergents. General Mills makes various foodstuffs from cereals to soups and pastries to pizzas. Hormel also sells various food products. Whirlpool manufactures appliances. Texas’s own Kimberly-Clark makes tissues and paper towels, among other products. Tempur Sealy sells bedding.
Americans use or consume products from these businesses every day, and those companies are all raising their prices, which hurts consumers’ purchasing power. Grocery stores and restaurants across the country have been raising prices as well.
But why these sudden price increases? Businesses are facing higher costs. Commodity prices are climbing quickly, as are wages due to labor shortages.
The contention that current inflation numbers are skewed because of “base-effects” from the early months of the pandemic is incomplete. The consumer price index (CPI) in May 2020 (the lowest point of pandemic-era prices) was just 1% below the CPI’s then-record high in February 2020, which has been eclipsed since August 2020. So, the base-effects argument does not explain a 5% annual increase.
Inflation is a tax, pure and simple, but not an explicit tax. Instead, it robs you of your purchasing power subtly and silently so that most people are none the wiser. It is not accomplished expressly through legislation, but through the sophisticated maneuvers of the Fed, giving inflation an air of mystery.
In reality, there is nothing mysterious about inflation. When the Fed creates money faster than the economy grows, then prices will tend to rise. That is why there is also no end in sight to this inflationary wave. The Fed continues to target historically low interest rates by creating money every month at an annual pace of more than $1.4 trillion, far faster than the economy is growing. The result is real wealth being taken from you—taxation without representation.
Nevertheless, it is surprisingly easy to stop inflation.
Ending inflation only requires the Fed to cease flooding the economy with money. If the Fed slows its money creation, though, then Congress cannot use inflation to finance the nation’s deficits, which seems to be Congress’s favorite way to spend.
Conversely, if Congress were to achieve a balanced budget through sound fiscal policy, then the Fed could return to its original mission of price stability, and not worry about backstopping massive federal deficits with newly created money.
This could be more quickly be achieved by implementing the Texas Public Policy Foundation’s Responsible American Budget, which sets a total budget limit at no more than the average taxpayer’s ability to pay for it as measured by population growth plus inflation. While this would not completely solve the problem of inflation, a journey of a thousand miles begins with a single step, and this will point the country in the right direction.
We must not let the best be the enemy of the good; something must be done sooner rather than later to stop the current runaway spending in Congress.
For example: Senators in Congress have recently reached a tentative bipartisan “infrastructure” deal to spend another $579 billion without raising taxes—or more accurately, without explicitly raising taxes. The spending will be financed with bonds purchased by the Fed, which means through the implicit tax of inflation. That $579 billion will still be collected, but not through so obvious a mechanism as the IRS.
No, inflation is too subtle, silent, and sophisticated for that.
Soon, every Texan will have more opportunity to pursue their dreams, to learn new skills, and to thrive. The Texas Public Policy Foundation’s Opportunity Project supported and tracked important legislation that improved workforce development, removed governmental barriers, and reformed safety net programs—all of which will make Texas a more prosperous state.
The 87th Texas Legislature recently ended sine die with several key victories for Texans—even as the ultimate grade is “incomplete,” with a looming special session to finalize missed opportunities. Among other things, lawmakers made strides toward helping those on the verge of falling through the cracks of society or those already in them. We at the Foundation call these efforts the Opportunity Project, whereby Texans are helping our fellow Texans with a hand up instead of a hand-out.
First, legislators successfully implemented programs to assist Texans with strengthening their chances to gain training, experience, and education that provide them with valuable tools for their careers. These tools help keep them from falling through the cracks by empowering them with skills and knowledge that offer them more opportunities to flourish.
For Texas to live up to its reputation as a business-friendly state, as well as to protect its liberties and prosperity in the long term, employers need to be able to develop the talents of Texans within their communities quickly and effectively. Texas workers in the hard-hit service sector could benefit
from learning new skills to fill specialized roles in IT, manufacturing, construction, and health care. Thanks to Texas Sen. Paul Bettencourt’s and state Rep. John Raney’s HB 4361, more (and more diverse) skills training programs can be launched at community colleges and public universities. The bill allows for more participation by the private sector—the employers who know what they need in the workforce, and are willing to help make it happen.
Another bill, SB 1615 expands Goodwill Adult Charters and creates a new subchapter, thanks to Sen. Bettencourt and Rep. Gary VanDeaver. Specifically, this bill provides adult students with an opportunity to earn a high school diploma and an industry certification simultaneously.
Sen. Angela Paxton’s and Rep. Harold Dutton’s SB 346 enables charter schools to apply for Jobs and Education for Texans (JET) grant program funding. This bill would simply enable charter schools to have access to the same resources as other public schools, for the benefit of their students and for our state’s economic competitiveness.
Representatives Jim Murphy and Tom Oliverson along with Senators Bettencourt and Chuy Hinojosa championed HB 3767 which establishes the Tri-Agency Workforce Commission on a permanent basis. This bill includes data-sharing provisions to improve transparency and accountability.
Next, legislators accomplished the removal of certain government barriers.
Sen. Nathan Johnson and Rep. James White accomplished passing SB 181 that helps in the criminal justice reform space by re-instating a driver’s license to Texans exiting the criminal justice system conditioned on certain criteria. This is a good measure to help get these individuals back to work.
Rep. Scott Sanford and Sen. Royce West propelled HB 569, also known as the Bonton Farms bill, through the legislature to the Governor’s desk. The bill requires a credit per day of confinement toward outstanding fines or costs in a misdemeanor case after the commission of the misdemeanor. This legislation helps reduce in–court costs and fines so that individuals reentering society have better opportunities for self-sufficiency.
Rep. Brad Buckley’s HB 139 provides license reciprocity for military members, veterans, and their spouses so they will not be forced to go through a new licensing process for an occupation when they move to Texas from another state.
Finally, Texas legislators made multiple safety net reforms.
The supplemental nutrition assistance program’s (SNAP) certification process received much needed reform thanks to Sen. Charles Perry and Rep. Armondo Walle. Their efforts culminated in SB 224, which streamlines SNAP’s certification process by reducing the amount of paperwork required for applicants 60 year or older and the disabled.
Moreover, Rep. Tan Parker’s and Sen. Drew Springer’s HB 1516 was another successful safety net reform effort that requires routine third-party efficiency audits of the temporary assistance to needy families program (TANF). It requires that these audits determine whether scarce taxpayer dollars for TANF are being used for their intended purpose or for unrelated budget designations.
SB 1138 requires a study of the of eligibility requirements, results, and resources for the purpose of streamlining most safety net programs, thanks to Sen. Bryan Hughes and Rep. Candy Noble. It also requires that the study assess the cost of the programs and bureaucracy to taxpayers compared to the benefits recipients and taxpayers receive.
There is a need to improve Texas’s inclusive institutional framework for increased job creation and more involvement by civil society that supports the dignity of work, permanent self-sufficiency, and paths to prosperity. The Foundation will continue this effort through the Opportunity Project.
The COVID-19 pandemic and forced business closures by state and local governments over the last year left much economic destruction. Many Americans have been recovering as we near herd immunity and states reopen, but fiscal and monetary policies out of D.C. are distorting economic activity and the labor market. For example, the labor market has been improving more slowly in recent months even as Congress recently passed the American Rescue Plan Act (ARPA), which led to fewer people wanting to work due to more unemployment “bonuses”—up to $1,200 per month—and even more in handouts. This has contributed to a record high of 9.3 million job openings with a similar number unemployed. Fortunately, the economy continues to withstand these headwinds for now, which is why a pro-growth approach is necessary.
Sound fiscal policy must begin with spending restraint. Gov. Kim Reynolds and the Republican-led Iowa Legislature continued to follow pro-growth fiscal conservatism during the most recently concluded session.
The Legislature passed an $8.1 billion FY 2022 state budget, which provided an estimated $1 billion in tax relief to taxpayers instead of growing government. This brings the budget well under the average taxpayer’s ability to pay for it, as measured by the Tax Education Foundation’s Conservative Iowa Budget, which sets a maximum threshold based on population growth plus inflation.
This budget is $290.7 million more than the FY 2021 budget. The $8.1 billion budget is over $4 million more than what Reynolds initially proposed. Nevertheless, Iowa’s fiscal house is in good standing.
The budget spends 97.66% of projected revenues for FY 2022, leaving a projected $385.8 million surplus. There is plenty of money available for a rainy day, including a combined $817.9 million in the Cash Reserve Fund and the Economic Emergency Fund and $316.4 million in the Taxpayer Relief Fund.
Reynolds and conservatives are criticized by many progressives and liberals who argue that areas of the state budget are underfunded, especially public education and health care (DHS), which includes Medicaid. However, this does not mean that spending has declined.
From 2013 to 2020, Iowa’s budget has grown 1.6 times faster than population growth plus inflation. Last year’s budget (FY 2021), which passed during the pandemic, was considered a “status quo” budget, with spending only slightly higher than the previous year. This is hardly austerity-style budgeting and only in government can slowing the growth of spending be considered a “cut.”
Public education (pre-k-12, community colleges and higher education) and health care consume 79.9% of the budget. In FY 1995, both were just 47.2% of total spending, so their share of spending is up nearly 70% since then. State aid to schools continues to be the largest appropriation at $3.4 billion, and added with funding to other payments to public education, is 54% of the budget. The health care budget is more than $2 billion.
The growing cost of both public education and health care should concern policymakers. The rapid increase in spending on these programs is on autopilot and is crowding out other budget priorities along with the private sector through higher taxes. Structural reforms to these programs are needed.
Spending restraint is the cornerstone for sound fiscal policy, and thereby helps keep taxes in check. A priority for the governor was making Iowa’s tax code and economy more competitive, while the Legislature provided much needed tax relief.
In part, this tax reform repealed the state’s stringent income tax triggers, which will allow the top rate to fall to 6.5% in 2023. This will provide greater tax certainty and create an opportunity for future tax rate reductions. Also, Iowa’s obsolete inheritance tax will be phased-out over a five-year period. The county mental health property tax levy will be phased out, as well.
As a result of prudent spending, the Iowa Legislature can consider further tax reform during the next legislative session. Tax reform in Iowa is far from complete and both individual and corporate tax rates need to be lowered and ultimately eliminated.
If policymakers want to seriously reduce tax rates, allowing for more money to stay with families, and make the tax code more competitive with other states, spending must be prioritized and limited.
Spending discipline is vital, and the Iowa Code limits spending to 99% of projected revenues. Strengthening the spending limitation by placing it in the state Constitution and limiting spending to population growth plus inflation, as outlined in the Conservative Iowa Budget, would better match the average taxpayer’s ability to pay for it every session.
The actions by Gov. Reynolds and the Iowa Legislature offer a clear contrast to President Joe Biden (and Democrats in Washington), who in his first 100 days in office has passed or proposed $6 trillion in new spending.
Fortunately, Iowa provides an example of responsible budgeting to federal policymakers and state legislators to provide more opportunity for people to flourish.
Texans will benefit from the policy wins achieved in the 87th Texas Legislature. Among other things, lawmakers:
Passed a Conservative Texas Budget
Strengthened spending limits
Maintained property tax relief
Improved taxpayer protections
Reduced regulatory barriers
The Texas budget, SB 1, came in below the Conservative Texas Budget—in fact, it is about $5 billion below the ceiling the Texas Public Policy Foundation set after excluding the $6.1 billion to maintain the property tax relief from last session. Great credit is due for Senator Jane Nelson and Representative Greg Bonnen because Texans simply cannot afford to pay for out-of-control spending.
Fortunately, measures to address future spending were addressed, too. SB 1336 by Senator Kelly Hancock was sent to the Governor’s desk. This makes much of the Conservative Texas Budget statute by limiting lawmakers from increasing the budget by more than population growth and inflation.
Following the 2019 Session, many local governments sought to bypass the 3.5% limit on property tax growth by taking on more debt in the form of certificates of obligation. This debt would then be passed on to taxpayers. HB 1869 by Representative Dustin Burrows clarifies the definition of debt and reduces this practice for taxing entities.
Local governments also sought to use the “disaster” loophole in 2020 to raise property taxes by 8%. Senator Paul Bettencourt filed SB 1427 which clarifies the types of disasters that can be used to bypass the 3.5% property tax rate limit—COVID-19 was NOT one of the disasters.
Additional bills that expanded on property tax reforms from the 2019 Session were SB 1438 and SB 1449 by Senator Paul Bettencourt. The first would clarify tax rate adjustments and the second would raise the income threshold from personal property from $500 to $2,500 which cuts taxes for small businesses.
On the regulatory side, there were several wins like HB 1560 by Representative Craig Goldman which cuts back on occupational licenses and cuts regulations. HB 139 by Representative Brad Buckley provides license reciprocity for military members, veterans, and their spouses so they will not be forced to go through a new licensing process for an occupation when they move to Texas from another state. Finally, there was SB 424 by Senator Juan “Chuy” Hinojosa which reduces regulatory penalties against small businesses for first time violations.
President Biden finally released his FY22 budget proposal on a Friday afternoon before a long Memorial Day weekend. This was good timing for the White House because it helps hide how irresponsible his budget is for America. But Americans know better, and his budget should be rejected and replaced with one that follows a responsible, pro-growth path forward.
During my year as the chief economist of the White House’s OMB during the Trump administration, I helped determine the economic assumptions and other key decisions in the President’s last FY21 budget. We advocated for a path toward more free market capitalism-supporting robust economic assumptions.
This policy forecast included faster economic growth resulting from making almost all of the Trump tax cuts permanent, further deregulations, and fiscal restraint of nearly $5 trillion in savings over a decade to balance the budget and to support opportunities for Americans. The path built on what was already working—an agenda that helped America reach a record low poverty rate and a record high in real median household income in 2019.
As someone who has worked at a think tank in Austin, Texas for years, I’ve seen the gains made by the Texas Model—no personal income tax and relatively lower government spending, taxing, and regulations, which contributes to more economic freedom, lower cost-of-living, and greater human flourishing compared to most states. Alternatively, California has taken a different approach—with now the second-highest personal income tax rate, stricter regulations, and substantially more spending that crowds out economic activity and destroys prosperity.
Given our system of federalism that was designed to produce a laboratory of competition among states, we can clearly see that the Texas Model works well over time, compared to states like California.
The Trump administration learned from the more fiscally responsible states, and used the Texas approach when it came to criminal justice reform, deregulation, lower taxes and proposed spending restraint, which resulted in substantial, tangible economic gains. Unfortunately, the Biden administration is following the folly of the big-government California model—which demonstrably doesn’t work.
There are at least three ways that President Biden’s first budget is irresponsible. First, Biden’s $6 trillion budget sends us down the road toward socialism.
The increase in the budget from the pre-pandemic baseline FY20 budget of $4.81 trillion shows that Biden’s budget is 25% higher. If Biden’s budget was limited to the average taxpayer’s ability to pay for it, as measured by population growth plus inflation of 1.37% in the Foundation’s Responsible American Budget, then taxpayers would foot the bill for a maximum of $4.88 trillion. The president’s budget is $1 trillion, or 23%, more than this metric, meaning that his budget proposal takes ownership of more means of production throughout economy and livelihoods (which is the definition of socialism).
The excess spending continues over time as the budget expands by $69 trillion over a decade, increasing the national debt by 50% or by $14.5 trillion, and results in the debt owed by each American rising by 50%, to about $120,000. The American Jobs Plan would add $529 billion and the American Families Plan adds $270 billion. These expansions of government are really anti-jobs, anti-families, and anti-American, as this is a road without a good destination.
Second, the Biden budget makes flawed economic assumptions.
As someone who helped determine the economic assumptions in President Trump’s final budget, I understand how there are many variables underlying the president’s budget. It’s not an exact science, but it’s important to do your due diligence.
An unlikely economic assumption in Biden’s budget is that real gross domestic product keeps increasing over time, despite the substantial tax hikes of more than $3 trillion. Additionally, the administration is acknowledging its proposals are more about socially engineering society to its preferred outcomes rather than achieving more economic prosperity. Economic growth in his budget is just 3.2% in 2022 and just 2% in 2023 after rampant government spending, with less growth thereafter. These growth rates are substantially less than the post-WWII average of 3% and lower than the three pre-pandemic Trump years. In short, the economic assumptions are weak even given a Keynesian view that government spending drives more growth, which I don’t share.
And even those growth rates are optimistic as higher taxes slow growth, just as substantially higher debt from the excessive spending does. Higher debt means either interest rates will have to rise as more debt is issued or the Federal Reserve will have to continue monetizing it and bring about inflation, which also contributes to higher interest rates.
Currently, inflation is about 4% (at an annualized rate), and will likely stay that high. It could even increase with the large increases in the money supply and the continued purchases by the Fed of $120 billion in Treasury securities monthly. Again, Biden’s budget fails again as it assumes inflation is only 1.8% in 2021 and plateaus at 2.3% starting in 2025, which is unlikely given the situation.
Meanwhile, the 10-year Treasury note rate is about 1.6%, but the proposed budget has it at only 1.2% for this year and rising to only 2.8% by 2031. With $14.5 trillion added to the debt (including net interest rising from $345 billion to $883 billion in 2031) and the probable higher inflation that will need to be subdued with less money creation and resulting higher interest rates, we could see much higher interest rates than what his budget assumes. This would result in even less economic growth than what’s in Biden’s budget, thereby increasing the number on welfare programs, which will itself drive up government spending. This will also influence other budget items.
Assuming lower interest rates in the Trump budget made more sense, given we were putting the budget on a path toward balancing over time. But the Biden budget maintains deficits of more than $1.3 trillion every year, with the deficit-to-GDP ratio only going down to 4.2% in 2029, which is well above the historical rate of 3%.
This brings us to the third way that Biden’s budget is irresponsible: It mortgages ours and our kids’ and grandkids’ futures.
Irresponsible government spending causing massive deficits along with rising net interest over time will cost us more and reduce opportunities for good-paying jobs, affordable credit, and a lower cost-of-living. It will also raise interest rates, resulting in lower real incomes and fewer job opportunities.
Fortunately, we know that the pre-pandemic policy approach taken by President Trump supported record levels of human flourishing. Congress should have done a better job of reining in government spending, and the administration could have touted spending restraint more. But even then, the growth in spending wasn’t at the level proposed by Biden. If Congress had controlled its spending, then the deficit, interest rates, inflation, and trade deficits would likely have been lower. Those goals are still worth pursuing.
That’s why TPPF created the Responsible American Budget, which is supported by many policymakers, economists, and thought leaders. It sets a maximum threshold for the federal budget every year based on the average taxpayer’s ability to pay for it (based on population growth plus inflation). This is supported by research on fiscal rules that have worked well in other countries and states, including Texas, Montana, Iowa, and Alaska.
By rejecting President Biden’s irresponsible budget proposal and instead incorporating the RAB in the budget process, Congress could enact a budget that meets the needs of the country without excessively burdening American families. The budget is already far too big; its size and scope are well above what our Founding Fathers imagined, which is why fat should be cut and the budget growth should be limited to the RAB, which will leave more money with families and allow entrepreneurs to build on the success of free-market capitalism.
Join us in ending the days of fiscal insanity in D.C. and replacing it with fiscal responsibility.
Vance Ginn, Ph.D.