The New Rules on Government Spending

There is no end to the upward creep in government spending as a percentage of GDP. For most countries, the ratio of government spending to the total size of the economy has been consistently on the rise since the Great Depression.

While some might propose dangerous, radical solutions, such as monetizing debt (which punishes individuals who were prudent enough to save), the truth is that you cannot make money out of thin air. Fiscal conservatism with appropriate rules-based spending is necessary — without question — to prevent economic and financial crises. While they are two resource-rich countries facing an array of similar issues, comparing the fiscal conservatism of Bolivia, versus the fiscal profligacy of Venezuela and the outcomes are a damning testimony to a lack of fiscal discipline.

Constitutional fiscal rules would prompt governments to take a hard look at spending priorities, and run cost-benefit analyses when making spending decisions. Learning from the mistakes of others, the New Physiocrats are firmly in favor of strict spending discipline, preferring only to use deficit spending as a means to rapidly implement the platform in its initial years, and during unexpected emergencies. Fiscal stimulus on a national level is now often lost due to leakage, as economies are typically not as closed as they were during the years of Keynes, and acts as a short-term band-aid solution at the expense of future growth. It does not address structural issues. In particular, countries running trade and current account deficits need to explore whether this is due to supply side and competitiveness issues, as these are indicators of countries consuming more than they are producing. Using fiscal stimulus to kick-start consumer demand can often be self-defeating in these cases, as the funds are spent on imports.

Constitutional provisions must be made to limit total spending as a percentage of GDP, to prevent adjustments in spending in an election year, and to ensure surpluses are maintained during years of growth. Only then will government budgets stop amplifying boom-bust cycles, stop encouraging corrupt practices, and begin to chip away at waste and excess.