BY VANCE GINN, PH. D.

On behalf of the Club for Growth Foundation

Introduction

Government spending is a critical factor in the economic health of American states and people. As economist Milton Friedman once said, “Cutting government spending and government intrusion in the economy will almost surely involve immediate gain for the many, short-term pain for the few, and long-term gain for all.”

While the federal government can run deficits, issue bonds for debt, and print money, state governments do not have these luxuries, as nearly all have a balanced budget requirement, and most have a tax and expenditure limit. This reality necessitates a disciplined approach to budgeting at the state level to maintain fiscal stability and not excessively hinder economic prosperity.

One effective framework for controlling state government spending is sustainable budgeting, which limits government spending growth to a maximum rate of population growth plus inflation. This metric ensures that government spending is, at most, what taxpayers can reasonably afford. In today’s higher-than-average inflationary environment, applying the principles underlying sustainable budgeting is essential to economic growth.

This report explores the concept of sustainable budgeting, its implementation across various states, and the challenges and opportunities that arise when applying this framework. Drawing on insights from the Sustainable Budget Project by Americans for Tax Reform, we can examine states in which consistent data evaluation has revealed the best and worst practices in budgeting. We can also highlight the importance of applying this approach at the federal and local government levels to realize the benefits of fiscal discipline.

The Concept of Sustainable Budgeting

Sustainable budgeting is based on the idea that government spending should not grow faster than the average taxpayer’s ability to pay for it. This budget limits government spending growth to a maximum rate of population growth plus inflation. The goal is to prevent the government from expanding faster than the economy and, thus, to avoid excessive taxation or debt accumulation that burdens taxpayers and stifles economic growth.

Why Population Growth Plus Inflation?

Population growth plus inflation is an effective metric for several reasons:

• Stability and Predictability: This measure typically provides a stable and predictable framework for budgeting, allowing for long- term planning. It reflects the natural growth of the economy and the taxpayer base, ensuring that the government does not expand beyond its means.
• Alignment with Taxpayer Capacity: By tying spending growth to a maximum of population growth plus inflation, the budget grows in line with the economy’s capacity to fund it. This prevents the government from burdening people with excessive taxation or borrowing.
• Simplicity and Transparency: The metric is straightforward to understand, making it a transparent tool for policymakers and the public. This transparency is crucial for maintaining public trust and accountability in government budgeting.

Viewing this metric as a maximum limit, not a target, is essential. Governments should spend less than this ceiling to provide room for tax relief and to create a buffer against economic downturns. When spending is consistently kept below this limit, budget surpluses will accumulate. These surpluses can be used for debt reduction, tax cuts, or spending on limited, constitutional roles for government. This approach ensures fiscal sustainability and promotes economic growth by leaving more resources to individuals, families, and entrepreneurs in the productive private sector.

Empirical Evidence: Spending Cuts Versus Tax Increases

Empirical research underscores the importance of spending restraint over tax hikes in promoting economic growth. Studies by economists Alberto Alesina and Silvia Ardagna, John Taylor, Casey Mulligan, and others have consistently shown that reducing government spending fosters greater economic growth than raising taxes. According to Alesina’s research, countries that focused on spending cuts during periods of fiscal consolidation experienced more robust and sustained economic recoveries than those that relied on tax increases.

Spending cuts reduce the immediate tax burden on citizens and foster an environment that encourages private-sector investment and job creation. In contrast, higher taxes to fund excessive government spending reduce disposable income, discourage investment, and stifle economic growth, leading to lower productivity and fewer opportunities for workers and employers.

The importance of responsible budgeting cannot be overstated. States that adopt sustainable budgeting practices see several benefits, including the following:

• Economic Growth: By keeping government spending in check, states allow the private sector to flourish, leading to more jobs, higher wages, and greater prosperity for their citizens.
• Lower Tax Burdens: States that control spending can provide tax relief to their residents, leaving more money in taxpayers’ pockets and allowing them to invest,
  save, or spend in ways that stimulate the economy.
• Fiscal Stability: Sustainable budgeting creates a more predictable fiscal environment, helping states avoid deficits and the need for drastic tax hikes or spending cuts during economic downturns.
• Long-Term Prosperity: When states focus on limiting government growth, they set the stage for long-term prosperity by ensuring that future generations are not saddled with unsustainable debt or excessive taxes.

Budget Growth vs. Population Growth Plus Inflation

From 2014 to 2023, several key trends emerged from the Sustainable Budget Project that highlight the huge cost to taxpayers of excessive spending:

• Federal spending surged by 81.7%, nearly four times faster than the 23.2% increase in the rate of population growth plus inflation. If federal spending had been limited to this rate, the federal government would have spent $2.1 trillion less in 2023, significantly reducing the national debt.
• At the state level, aggregate state spending, excluding funds received from the federal government, increased by 61.1% during the same period. Had state spending been aligned with population growth plus inflation, states would have spent $1.44 trillion in 2023, which is $454 billion less than the $1.89 trillion spent.
• Had federal and state governments adhered to sustainable budgeting practices during the previous decade, taxpayers could have avoided more than $2.5 trillion in taxes and debt in 2023 alone to invest in new and existing businesses, create new jobs, and raise wages.

From 2014 to 2023, key trends emerged from the Sustainable Budget Project that highlight a huge cost to taxpayers of excessive spending.

TABLE 1

Table 1 provides a comprehensive analysis of state budget increases relative to the rate of population growth plus inflation from 2014 to 2023. It highlights the extent to which each state’s budget has grown above or below sustainable budgeting as measured by the rate of population growth plus inflation in 2023 and the cumulative amount over the last decade. For comparison, the last two columns provide the growth in real private gross domestic product (GDP) over the decade and the ranking for each state. The growth in the real private GDP for the country was 26.7%.

The data clearly illustrate the significant variations in state budgeting practices and economic growth. Some states, such as Colorado, North Carolina, and Wyoming, have kept spending growth below the rate of population growth plus inflation, thereby protecting taxpayers from undue financial burdens. Other states, including California and Illinois, have allowed their budgets to grow far beyond sustainable levels, resulting in billions of dollars in excess spending, ultimately placing a heavier burden on their residents. Although some states with less spending than population growth plus inflation have less economic growth, such as West Virginia, Wyoming, and North Dakota, other issues besides spending restraint contribute to economic growth.

Among the 50 states, only 5 states held the cumulative spending growth (in state funds and all funds, which includes state and federal funds) below the rate of population growth plus inflation over the last decade, thereby keeping taxes lower than the average taxpayer can afford:

1. Alaska
2. Colorado
3. North Dakota
4. Oklahoma
5. Wyoming

Seven more states held the cumulative growth in state funds, but not all funds, below the rate of population growth plus inflation over the last decade:

1. Louisiana
2. Massachusetts
3. Montana
4. North Carolina
5. Ohio
6. Rhode Island
7. West Virginia

Analysis of Best- and Worst-Case Scenarios

The data show that many states have significantly exceeded sustainable spending levels in state funds, leading to higher taxes and financial burdens on taxpayers. This section will highlight both the best- and worst-case scenarios from the table.

Best-Case Scenarios: Colorado, North Carolina, and Wyoming

COLORADO: Colorado, with its Taxpayer’s

Bill of Rights (TABOR), remains a strong example, even though the state has faced challenges in maintaining the integrity of this fiscal rule over the years. Colorado managed to keep its cumulative spending of $19.6 billion lower than it would have been had it followed a less stringent budgetary path over the last decade. This success demonstrates the effectiveness of TABOR in controlling government growth and returning surplus funds to taxpayers, though there is room for improvement.

NORTH CAROLINA: North Carolina has been a leader in fiscal conservatism over the last decade with spending restraint and tax relief. The state has spent $4.4 billion less than population growth plus inflation and had the 16th fastest real private GDP growth over the last decade.

WYOMING: Wyoming exemplifies sustainable budgeting, having spent and taxed $25.1 billion less than it could have if its budget had grown at the rate of population growth plus inflation. Wyoming’s conservative budgeting practices have allowed the state to maintain a strong budget surplus, providing a cushion against economic downturns. This approach has helped Wyoming avoid many of the fiscal pitfalls that have plagued other states.

Worst-Case Scenarios: California, New York, and Illinois

CALIFORNIA: California represents a worst-case scenario, with a budget that has grown $472.2 billion more over the last decade than what would be considered sustainable under the population growth plus inflation metric. This excessive spending has led to higher taxes and increased the financial burden on California’s taxpayers, contributing to an outflow of residents and businesses to states with more favorable fiscal environments.

ILLINOIS: Illinois is another example of fiscal irresponsibility, having spent $140.1 billion more than sustainable levels. Illinois’s chronic overspending has led to a mounting debt crisis and one of the worst credit ratings among US states. The state’s fiscal woes highlight the importance of adopting and adhering to strict budgetary controls.

NEW YORK: New York shows significant fiscal mismanagement, with a $81.3 billion excess in spending over the past decade. The state’s inability to control its budget has resulted in one of the highest tax burdens in the country, driving away residents and stifling economic growth. New York’s fiscal policies underscore the dangers of allowing government spending to grow unchecked.

Beyond Sustainable State Budgeting

The principles of sustainable budgeting should not be confined to state governments alone. Adopting similar fiscal rules would benefit both the federal and local governments. There should also be budget process reforms that can help not only to limit spending growth but also to cut it, because most governments are already spending too much.

Federal Government

At the federal level, the absence of a strict spending limit has led to an unsustainable trajectory of debt and deficits. The federal government’s ability to print money and borrow extensively has masked the true cost of excessive spending, leading to inflation and economic distortions. Had the federal government adhered to a spending limit based on population growth plus inflation, the national debt could have been significantly lower and the economy more robust. Implementing a fiscal rule similar to population growth plus inflation at the federal level would require political will, but it could be instrumental in reversing the current trend of growing deficits and debt. This rule would force Congress to prioritize spending, reduce waste, and focus on essential government functions.

Local Government

Local governments also face challenges in maintaining fiscal discipline, particularly as they deal with the pressures of growing populations and infrastructure demands. By adopting a sustainable budget approach, local governments can ensure they do not overextend themselves financially, which could lead to higher local taxes and fees. This approach would involve local governments setting spending limits that reflect the growth of their tax base and the inflationary pressures on their budgets. This would help localities avoid the pitfalls of fiscal mismanagement and ensure they remain financially stable over the long term.

Learning from States

Many states have adopted budget best practices, as highlighted by the American Legislative Exchange Council, to improve their budget processes. Here’s what states are doing and how things could be improved there and elsewhere:

• COLORADO: Colorado’s TABOR restricts the revenue that state and local governments can retain and spend. Excess revenues are refunded to taxpayers, helping enforce fiscal discipline, but Colorado should move to cutting rates rather than giving checks.
• FLORIDA: Florida emphasizes long-term financial planning. The state requires the legislature to create a three-year outlook on budgetary impacts for proposed expenditures and revenue changes
• LOUISIANA: The state conducts insightful efficiency audits of some programs through the state auditor’s office.
• TEXAS: Texas uses bottom-up, performance-based budgeting, starting with a ceremonial budget from the governor that the legislature crafts further. Texas also has a relatively strong spending limit, updated in 2021, based on the rate of population growth and inflation, and the state conducts external efficiency audits on some programs.
• UTAH: Utah’s one-door policy streamlines operations and improves service delivery through efficiency audits and performance- based budgeting. It also involves putting together the workforce and safety net under one agency, which could soon be part of Congress extending the Workforce Innovation and Opportunity Act. Utah also has a constitutional spending limit tied to population growth and inflation.

Recommendations

States should draw inspiration from the best practices employed by these states and others, including these additional best practices:

• Providing an Annual Budget Analysis: Annually evaluating the budget and specific programs through the budget committees after regular sessions will increase transparency and ensure spending is in line with the budget.
• Adopting Priority-Based Budgeting: Implementing priority-based budgeting, which is a combination of performance- based and zero-based budgeting, will allow for a thorough evaluation and justification of all expenditures of taxpayer money as should be done every budget cycle.
• Conducting Independent Efficiency Audits: Regular, external efficiency audits can bring transparency and accountability to government programs and savings to taxpayers.
• Strengthening Spending Limits: Imposing strong constitutional and statutory spending limits, like the sustainable budget approach, can help enforce fiscal discipline for state and local spending with surpluses to lower tax rates.
• Engaging in Long-Term Financial Planning: Incorporating long-term financial planning can ensure sustainability and preparedness for economic fluctuations.
• Reducing Dependency on Federal Funds: Focusing on transparency and reducing dependency will help states prepare for potential reductions in federal funds.

Conclusion

Sustainable budgeting is more than a fiscal policy—it is a pro-growth commitment to economic freedom, responsibility, and efficiency. By controlling government spending through strong spending limits in their constitutions and statutes, states can support an economic environment in which individuals and businesses can thrive.

The successes and challenges highlighted in this report provide a roadmap for other states to follow, demonstrating that fiscal discipline leads to economic prosperity. The examples of Colorado, North Carolina, Wyoming, and others demonstrate the benefits of adhering to sustainable budgeting principles, while the challenges faced by California, Illinois, and New York serve as cautionary tales of what happens when these principles are ignored.

As more states and governments at all levels consider adopting these principles, the potential for significant improvements in fiscal health becomes clear. By viewing population growth plus inflation as a maximum limit, not a target, governments can ensure that they live within their means and provide the best possible environment in which their citizens to prosper.