Congress Needs Some Fiscal Rules

Congress Needs Some Fiscal Rules


Approval ratings for Congress are slumming at 17%. This is nothing new. With the exception of a short-lived patriotic spike following 9/11, it has been going on for decades. Yet this already failing grade seems a little too generous in light of lawmakers’ terrible record as stewards of taxpayer dollars and the fiscal health of the United States.

According to the most recent long-term budget projections released by the Congressional Budget Office (CBO), debt held by the public is projected to rise from 78% of gross domestic product this year to 144% by 2049. That report informs Congress that if it doesn’t change the fiscal course we’re on, they will “increase the risk of a fiscal crisis—that is, a situation in which the interest on federal debt rises abruptly because investors have lost confidence in the U.S. government’s fiscal position.”

Something’s got to change if we are to avoid the fiscal crisis that the CBO warned about. One possible way out of our current dilemma may be through the implementation of fiscal rules. The key, however, is to design and implement these rules in a way that would prevent members of Congress from lifting or ignoring them as they have with many other rules before.

The good news is that as the underlying structural roots of budget deficits have become more universally understood, a growing number of countries have adopted spending restraints to restrict unsustainable growth in government and reshape democratic governance. Columbia University macroeconomist Pierre Yared found that in 1990 only seven countries had fiscal rules in place, but by 2015, 92 countries had adopted them. Governments around the world have been adopting mandated deficit, spending or revenue limits to restrict fiscal policy and curtail further increases in government debt.

While fiscal rules that are exceedingly tight tend to be unsuccessful due to conflicts with broad political objectives, rules that are too soft are ultimately useless. No set of fiscal rules will make much of a difference to the budgetary cycle if they are limited to the short-term (single year), if enforcement is weak and if potential future impacts are ignored during the budget process.

Applying these changes in budgeting practices is a matter of finding the fine line between tight and soft fiscal rules and minimizing the deficit bias of policymakers.

In a recent study published by the Mercatus Center at George Mason University, a free-market think tank, we reviewed four international examples of countries where the implementation of fiscal rules has been associated with a declining debt-to-GDP ratio and broadly sustainable patterns of government spending. These examples include Hong Kong (where debt as a share of GDP is zero), Switzerland (where budget deficits are almost unheard of) and Denmark and the Netherlands (where relatively new spending rules have led to dramatic improvements in fiscal conditions in recent years).

To focus on one example, Denmark adopted a budget rule in 2014 that ensures a balanced budget or a surplus by setting a limit of 0.5% of GDP on the structural budget deficit. An independent council then annually assesses whether economic policy adheres to the target of the balanced budget rule and whether the proposed expenditure ceilings are consistent with projections. If expenditures exceed these targets, automatic cuts in the government’s budget are mandated to bring the fiscal house back into order.

The evidence suggests that these fiscal rules are broadly effective at restraining deficit spending. Comprehensive data covering many years show that countries with such rules have annual budget deficits that are smaller by an average of 0.5% of GDP when compared to countries without such rules.

Governments around the world and across the ideological spectrum have implemented prudent budget rules or policies. What is noticeable is that all rules that are effective share some common features. The most successful rules place a limit on the growth of spending or debt (as opposed to a balanced-budget constitutional rule favored by Nobel laureate James Buchanan and some other economists). Rules that tend to have the greatest rate of compliance also set automatic triggers to reduce politicians’ discretion and restrain excessive government expenditure.

The debt problem is one rooted, fundamentally, in factors related to democratic governance. This is particularly the case in the United States, where the application of fiscal rules would face several key challenges, such as the constitutionality of delegating spending authority to an independent committee. That said, we do not have the luxury to avoid applying what we know from the experiences of other countries when deciding how to fix our fiscal problems.

Elected officials must shift their primary concerns away from short-term political and economic outcomes and instead consider the long-term fiscal implications of inaction.

Veronique de Rugy is a senior research fellow with the Mercatus Center at George Mason University. Jack Salmon is a research assistant with the Mercatus Center. They coauthored a Mercatus policy brief that asks, “Are Fiscal Rules an Effective Restraint on Government Debt?