Dan Mitchell of the Cato Institute: How to balance the budget

It’s Simple to Balance The Budget Without Higher Taxes

Uploaded by on Oct 4, 2010

Politicians and interest groups claim higher taxes are necessary because it would be impossible to cut spending by enough to get rid of red ink. This Center for Freedom and Prosperity video shows that these assertions are nonsense. The budget can be balanced very quickly by simply limiting the annual growth of federal spending.

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People are being told that radical spending cuts are a must if we are to balance the budget, but maybe that is not true.

Even though I favor radical reductions in the burden of government, I’ve made the point that good fiscal policy merely requires that government spending grow slower than the private sector – what I call Mitchell’s Golden Rule.

And if lawmakers simply cap the growth of spending, so that it grows by about 2 percent annually, the budget deficit disappears in a decade.

It’s even better to impose more restraint, of course, which is why I’ve said favorable things about Senator Rand Paul’s plan.

There’s also a “Penny Plan” that would reduce primary spending (non-interest spending) by 1 percent each year. As James Carter and Jason Fichtner explain, this degree of fiscal restraint would reduce the burden of government spending to about 18 percent of economic output.

Any viable solution must cut spending growth. Sen. Mike Enzi of Wyoming and Rep. Connie Mack of Florida have introduced legislation in their respective chambers to do just that. Their “Penny Plan” – recently updated to reflect the latest budget developments – calls for reducing federal spending (excluding interest payments) 1 percent a year for five years, balancing the budget in the fifth year. To maintain balance once it’s reached, Mr. Enzi and Mr. Mack would cap federal spending at 18 percent of GDP. By no small coincidence, 18 percent of GDP roughly matches the U.S. long-run average level of taxation since World War II. Is it realistic to think Congress could limit federal spending to 18 percent of GDP? Actually, there is precedent. Federal spending fell as a share of GDP for nine consecutive years before bottoming out at 18.2 percent of GDP in fiscal 2000 and 2001. The Penny Plan would return federal spending, expressed as a share of GDP, near the level achieved during the last two years of the Clinton administration.

The various interest groups that infest Washington would complain about this degree of spending discipline, but Carter and Fichtner make a good point when they say that this simply means the same size government – as a share of GDP – that we had when Bill Clinton left office.

I realize I’m getting old and my memory may not be what it used to be, but I don’t recall people starving in the streets and grannies being ejected from hospitals during the Clinton years. Am I missing something?

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