Here's How to Balance the Budget

Our fiscal policy goal should be smaller government. Regardless of how it is financed, government spending diverts resources from the productive sector of the economy, and there is widespread evidence that nations with larger public sectors suffer from weaker economic performance.

The politicians in Washington don’t want to focus on the size of government. They would much rather focus on deficits. This allows them on certain days to say we need more spending because deficits somehow are supposed to be good for the economy (this video explains why Keynesianism is nonsense). And it allows them on other days to say we need higher taxes because deficits are bad for the economy.

Many Americans understand that something is wrong with fiscal policy, and many of those people view deficits as a symbol of fiscal excess in Washington. They need to be careful, though, that politicians don’t take advantage of that concern and lure them into supporting bad policy. Contrary to the rhetoric coming out of Washington, we don’t need higher taxes. Here’s a video that explains why spending restraint is the answer.

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The main message is that limiting the growth of government is the right way to get rid of red ink. In other words, there is no conflict between advocates of limited government and supporters of fiscal balance.

Indeed, the video shows that it is possible to quickly balance the budget while also making all the 2001 and 2003 tax cuts permanent and protecting taxpayers from the alternative minimum tax. All these good things can happen if politicians simply limit annual spending growth to 2 percent each year. And they’ll happen even faster if spending grows at an even slower rate.

This debunks the statist argument that there is no choice but to raise taxes.

Here’s a chart from the video that shows the basic math. Revenues are expected to grow by about 7 percent each year (and that’s with all the tax cuts made permanent. Reducing the deficit therefore is simply a matter of limiting federal spending so that it grows by less than 7 percent each year.

The video shows three options – a spending freeze, a 1 percent limit on annual spending growth, and a 2 percent limit on annual spending growth. In an ideal world, of course, we would actually reduce spending.