Virtually everywhere, from tiny towns to the world's biggest economies, a balanced budget is like a Good Housekeeping seal of political approval. And yet governments just can't seem to stick to the rules they set for themselves. Should they even bother trying?
The idea of a balanced budget certainly seems sensible. What goes in, goes out. No borrowing, and not too much hoarding of taxpayers' hard-earned dollars, either.
Every state in the union except Indiana and Vermont has a law or constitution requiring a balanced budget. The EU decided in 1997 that countries using the euro currency would not be able to run a deficit of more than 3 percent without facing stiff fines and penalties. For decades, the IMF has made balanced or near-balanced budgets a condition of aid to some developing countries.
In practice, though, balanced-budget rules don't always work. At least 40 states' budgets for next year will have to cover shortfalls from 2002, and the situation may worsen next year. Germany is likely to flout the EU's budget rules this year, and France is dangerously close, with a shortfall of 2.8 percent this year that is expected to grow in 2003. After the spending limits of the Balanced Budget Act of 1997 expired this year, Washington led the nation back to the land of 12-figure deficits.
The recent downturn in the global economy is responsible for most budgetary problems. Incomes for individuals and companies stopped growing or shrank, and so did tax revenue. At the same time, more people became eligible for publicly funded income support, jobless benefits, health insurance and the like. The governments had not planned enough for leaner times and found themselves in the red.
As a result of the balanced-budget rules, many states and countries have to cut spending and raise taxes at the worst possible time -- pursuing policies that stifle economic growth when it is most needed. This conundrum is well-known elsewhere in the world; critics of the IMF castigated its economists for insisting that Southeast Asia's crisis-ridden nations install austere fiscal policies in the late 1990s, slowing that region's economic recovery.
So do balanced-budget rules make sense? They can, if governments behave responsibly. Yet few do. At the extreme is Argentina. Its economy grew by 22 percent, adjusted for inflation, from 1993 to 1998. Despite strong early increases in tax revenue, its federal government ran a deficit in every single year, rather than surpluses that could have paid off debt or cushioned the budget in the future. When the economy turned south, the country could not borrow enough to make ends meet and collapsed.
Despite much better economic fundamentals in the US, many of the 50 states made the same kinds of mistakes. The nation's overall economy grew 32 percent from 1993 to 2000. States used higher tax revenue to pay for more services, new construction projects and higher salaries for government workers. Few put enough money aside for the inevitable downturn in the economic cycle.
Why didn't the states and countries save more when times were good? One reason is overoptimism. During the last boom, some forecasters wondered openly whether there would ever be another recession. And surpluses always seem to burn holes in politicians' pockets. They'd rather win points with voters by returning the money through lower taxes or by spending it on popular programs.
But hold on. Plenty of economists say Washington's quick switch to deficits was a good thing. During weak economic times, they argue, worsening fiscal balances can be a side effect of policies that lessen hardship, like tax cuts and extensions of unemployment benefits.
Unlike the federal government, though, the states do not have the leeway to put such policies into effect.
This year, at least 37 states have scaled back spending.
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