Budgeting for Prosperity: Spending Limits or Structural Balance?

Originally published at National Review's Capital Matters. 

As President Trump prepares to deal with a fiscal crisis and states begin their legislative sessions to write budgets, fiscal responsibility should be a top priority. Just as in a family, crafting a budget sets priorities, but politicians should have a bias toward conservative budgeting. It is not, after all, their money. With deficits and debt soaring at the federal level and spending pressures rising at the state level, how should they best restrain government growth?

Different approaches address this challenge. Structural balance frameworks aim to stabilize budgets over the economic cycle but often fail due to their flawed design. By focusing on stabilizing spending rather than limiting it, structural balance encourages government growth and increases the risk of deficits and tax hikes. However, a better alternative is passing sustainable budgets with a spending limit, such as Colorado’s Taxpayer’s Bill of Rights (TABOR), which caps government spending growth to a maximum rate of population growth plus inflation and returns surpluses to taxpayers. Moreover, spending limits provide a more transparent and predictable cap on spending. They better align spending with the average taxpayer’s ability to pay for it and ensure the government grows slower than the private economy.

Colorado’s TABOR is an example of how spending restraint can work effectively. Created in 1992, TABOR limits the growth of state and local government spending to the combined rates of population growth and inflation. When revenues exceed these limits, the surplus is returned to taxpayers, ensuring government growth is kept in check. This model has proven effective even as Colorado shifted politically from a red to a purple to a blue state. For example, Colorado recently refunded taxpayers over $1.7 billion because of TABOR’s limits. However, the policy should be improved by capping all state funds and using surpluses to lower tax rates. Lower tax rates leave more money in people’s pockets rather than possibly returning it later through refunds, providing better economic gains in increased productivity and investment.

Structural balance frameworks attempt to balance budgets over the economic cycle by allowing for deficits during downturns and requiring surpluses during booms. While this may sound reasonable, the approach often fails in execution. Are lawmakers likely to be willing to maintain spending discipline (including, where necessary, cuts needed to ensure or maintain surpluses during good times)? The questions all too easily answer themselves. Structural balance frameworks tend to stabilize spending at higher levels, creating a ratchet effect that permanently expands government.

Appropriators and bureaucrats often promote structural balance approaches that prioritize spending flexibility over fiscal discipline. The framework also relies heavily on Keynesian economics, encouraging deficit spending during recessions to boost aggregate demand. It shifts resources from the productive private sector to the government, creating inefficiencies and long-term economic drags. Tax hikes to fund these deficits could further harm growth, as shown by studies such as Austerity by the late Italian economist Alberto Alesina, which found that raising taxes slows economic recovery and grows deficits while spending cuts promote growth and balanced budgets.

Limiting spending growth to a maximum rate of population growth plus inflation is a superior approach because it aligns government growth with the average taxpayers’ ability to pay for it. Personal income growth forms the basis of tax revenues and comprises population growth, inflation, and private productivity growth. By capping spending at population growth and inflation, governments ensure fiscal sustainability while leaving private productivity untaxed, fostering innovation and economic expansion. This metric also connects directly with taxpayers, as it reflects real-world constraints. Population growth adds new taxpayers, while inflation captures rising wages. Together, they create a fair and predictable cap on government spending, preventing runaway budgets and ensuring the burden of government remains manageable for families and business owners.

Spending limits also generate surpluses during periods of economic growth, which can be used to reduce tax rates. For example, President Trump’s last federal budget included a spending cap, recognizing its potential to align government incentives with taxpayers’ interests: “In addition to the Administration’s policies, a fiscal rule, or benchmark, that limits total Federal spending to an amount representing affordability would embody fiscal responsibility and bring transparency to reasonable limits on the growth of spending. Such a fiscal rule would provide a benchmark to evaluate future federal spending paths and is a helpful tool to limit spending growth to a more reasonable and sustainable level.”

Lowering tax rates by spending less helps return money to taxpayers and supports faster economic growth by encouraging investment, productivity, and entrepreneurship. Colorado’s TABOR demonstrates how spending limits foster fiscal responsibility, even in politically diverse environments. In fact, Coloradans have voted down recent changes that would have weakened TABOR. Expanding this model to other states and the federal government would create a framework for sustainable budgeting that prioritizes taxpayers, reduces deficits, and incentivizes economic growth.

As states and the federal government grapple with budgeting challenges, structural balance frameworks are insufficient for achieving fiscal responsibility as they are weaker than the balanced budget requirements in nearly all states. They prioritize government interests over taxpayers by stabilizing high spending levels and encouraging deficits. Spending limits offer a proven alternative that ties government growth to sustainable metrics, returns surpluses to taxpayers, and limits the government’s economic burden.

Adopting spending limits at all levels of government would empower taxpayers, incentivize growth, and create a stable fiscal environment. Let’s avoid flawed Keynesian frameworks and embrace pro-growth policies prioritizing budgetary discipline and economic freedom.