John Locke Update / Research Brief

N.C. Budget Processes Inspire Federal Reform Recommendations

posted on in Fiscal Insight, Spending & Taxes
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Policymakers around the country look to North Carolina’s fiscal example to guide their quests for lower taxes. Restrained spending has made it possible for state government to tax less and save more. We have identified seven keys that have made sustainable budgets possible, beginning with a commitment to spend less than is available. As debt continues to engorge the federal budget, North Carolina institutions and processes also seem to be inspiring recommendations to reform how Congress spends.

“If your outgo exceeds your income your upkeep will be your downfall.” This adage, attributed to existentialist philosopher Bill Earle, is a simple truth about the value of prudence. Dickens’ Mr. Micawber explained it more prosaically to David Copperfield: “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” But this advice is ignored today.

Chris DeMuth of the Hudson Institute sees government’s “borrowed-benefits” budgeting as a sign of “our comprehensive rejection of constraint — not only in public finance but in politics, in constitutional structure, in rhetoric, and in culture.” George Will labels it “decadence.”

Decadence has a cost, however, and that cost has been slower economic growth for the past two decades. North Carolina State University professors Thomas Grennes and Mehmet Caner, with Qingliang Fan of Xiamen University, conclude that economic growth in the United States from 1995 to 2014 was a percentage point lower each year than it would have been without the explosion of debt since the 1960s. Andy Taylor, also at NC State, explained in Carolina Journal how the slow growth puts pressure on government to take on more debt, “Every one percentage-point loss in GDP growth costs the government about $10 billion.” Pretty soon that adds up to real money.

Both Taylor and Grennes and his colleagues see a need for new budget institutions at the federal level. As Taylor notes in National Affairs, “The regular appropriations process is truly stacked against fiscal hawks. Those who desire to constrain spending do not enjoy the leverage generally conferred on coalitions built to protect the status quo.” One of the single biggest obstacles is the threat of a government shutdown if no budget passes, which “ultimately…directs spending upward.”

Taylor recommends a form of permanent appropriation for agencies that echoes what North Carolina has done for the entire budget. If there is no new budget by the start of a fiscal year, spending continues as before. Cuts and increases only take effect with the new bill, but the best alternative to a negotiated agreement moves from no government to the same government. The current legislative session might be the first time this rule is put to the test in North Carolina, but past research has shown significant savings in state spending.

Rules and reforms are only good if they are heeded. Since 2011, the Republican-led General Assembly has established its credibility for spending restraint, but the contrast is not far removed. In 2007, with a $1.5 billion year-end cash balance, a Democratic-led General Assembly ignored the statutory requirement to put one-fourth of that balance in the Savings Reserve Account. Legislators did the same again in 2008 with a cash balance of $575 million. Budget rules can only be enforced by legislators themselves or by a governor’s veto. With his three budget proposals, Gov. Roy Cooper has embraced borrowed benefits the way Thanos embraced Infinity Stones. With the House’s budget out, we’ve begun the endgame for this session.

As Senior Fellow, Joe examines fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative within the Office of State Budget and Management, which led to changes in automotive fleet management, natural and… ...

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