Do spending caps work?
By Scott Sumner
The news media tends to focus on problems. Thus it’s refreshing to see an article that examines places where things have gone right. Veronique de Rugy has a piece in Reason magazine that looks at a variety of countries that have done well, including Switzerland:
After public referenda in 2001, the Swiss government in 2003 implemented a new constitutional requirement aimed at ensuring a balanced annual budget through a cyclically adjusted expenditure ceiling. The short story is that Swiss politicians are not allowed to increase spending faster than average revenues rise over a multiyear period (as calculated by the Swiss Federal Department of Finance). That basically confines spending growth to a rate no higher than the rate of inflation plus population growth. . . .
Annual spending growth fell from an average of 4.3 percent before the rule was implemented to 2.5 percent after. And in 10 out of the past 14 years, Switzerland has had budget surpluses. Deficits have remained rare and small, averaging 0.85 percent of GDP during this period. At the same time, Swiss debt has fallen from almost 60 percent of GDP in 2003 to around 42 percent in 2017. Switzerland now finds itself in an unusual place, with policy makers frequently debating what to do with all of their surplus revenue—a situation that seems a million miles away from the fiscal conditions in the United States.
That’s not to say that budget rules are magic bullets that will work everywhere. In countries with a culture of corruption it may be difficult to prevent governments from circumventing the rules. But a similar policy does seem to have been successful in Germany:
In 2010, Germany adopted a policy similar to the Swiss debt brake. The rules are parallel to each other in that each follows the “small-government Keynesianism” model that allows the government to spend in a recession but cuts expenditures in good times, creating surpluses for when the country needs them. While the German rule isn’t as strict as the Swiss one, it has successfully reduced Germany’s public debt from 80 percent of GDP in 2010 to 64 percent of GDP in 2017.
Veronique de Rugy also has a recent NYT piece on the trade war, which I highly recommend.