Rosy Scenarios Aren’t Conservatism


By John Hood
RALEIGH — President Donald Trump’s latest budget contains some conservative proposals to save the taxpayers’ money. But it relies on an unconservative practice — one that North Carolina’s legislature has wisely chosen not to use.

Everyone agrees budgets are about choices. Progressives and conservatives mean different things by that, however. Progressives say the government’s budget reflects the collective choice of society about what, and whom, to value. Conservatives observe that “government” and “society” are not synonymous, that the more government taxes and spends, the less freedom we have as individuals to make our own choices with our own money.

A fiscally conservative budget, then, is one that funds only a few core services that cannot be delivered through voluntary means — through markets or civil society — and collects only enough revenue to finance those services.

Of course, this conservative view contains an ambiguous term of its own: “core services.” We don’t all mean the same things by it, and special-interest lobbying inevitably arises to protect programs from the budget ax even when their constituencies are relatively small and their effects are minimal or counterproductive.

In the real world of government budgeting, fiscal conservatives need more than just abstract principles or good intentions. They need rules and practices that encourage spending discipline even when interest-group politics will point the other way.

One such tool is to assume something like the worst, not hope for something like the best. Across the political spectrum, there is a strong temptation to use rosy scenarios to make your budget numbers add up. You assume artificially low expenditure growth or artificially high revenue growth.

Unfortunately, the president’s latest budget plan does both by assuming that the nation’s economy will average 3% a year in inflation-adjusted growth over the coming decade. If true, that would indeed reduce entitlement expenditures and boost federal revenue growth enough to make a significant dent in annual deficits.

But it’s not a reasonable assumption. Growth was about 2.3% last year. Most public and private forecasts put annual GDP growth at somewhere between 1.8% and 2.2% over the coming decade. If that happens, President Trump’s proposed reductions in defense, non-defense discretionary, and Medicaid spending will fall far short of taming federal deficits. Future presidents and Congresses will be compelled by fiscal and economic reality to raise taxes, enact savings in Social Security and Medicare, or some combination of the two.

In North Carolina, rosy scenarios are much rarer. We have one of the strictest balanced-budget requirements in the country, which serves to temper the use of unrealistic forecasts (if you purposefully overstate or understate, reality quickly and inescapably intrudes). Moreover, although it is not yet required by the state constitution, the North Carolina General Assembly has kept average growth in state expenditures at or below an annual combination of population and inflation.

Think tortoise over hare. North Carolina didn’t ramp up spending after the Great Recession as fast as other states did. But when the next recession comes, North Carolina won’t crash as hard, either. We have billions of dollars in savings and other reserves. And we haven’t fallen into the trap of promising in good years what can’t be delivered in lean ones.

Still more heartening is the fact that today’s state policymakers are finally paying serious attention to the one area where past leaders did engage in rosy-scenario thinking: employee benefits. Even under a generous assumption of future investment gains, North Carolina’s pension fund for teachers and state employees has promised some $10 billion in future benefits that cannot be funded by current assets and cash flows. Under more realistic assumptions, the pension hole would be tens of billions of dollars larger, as is the current unfunded liability for retiree health benefits (nearly $30 billion).

Lawmakers have begun to adjust benefits and accumulate assets in response. But it will take many years of disciplined budgeting to eliminate these shortfalls. Future governors and legislatures will be tempted to wish them away. Fiscal conservatives should just say no.

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