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October 25, 2021

John Hood: Raleigh gets balanced budgeting right while Washington remains wrong

By John Hood

I’ve been spending a lot of time recently in conversation with right-leaning leaders, policy experts, donors and activists. My purpose is to assess the health and trajectory of American conservatism at this critical moment.

A common refrain from disgruntled conservatives is that for all the talk of reducing the size and scope of government, their movement has made little progress. Federal deficits are massive. There’s been no substantial reforms of the entitlements that now account for most of the federal budget — of Social Security, Medicare, and Medicaid — and past administrations of both parties have mostly added rather than subtracted to the government’s powers and expenses.

I share their disdain for the utter lack of fiscal responsibility in Washington. It’s a bipartisan problem. But the federal government isn’t the whole story. Here in North Carolina, conservative governance has actually reduced the size of state government and significantly improved its fiscal condition.

Left-leaning politicians and organizations agree with my observation here — although they don’t, of course, consider it to be good news.

According to the latest calculation by the North Carolina Justice Center, the budget deal that leaders of the state house and senate have struck will set General Fund spending for the 2021-22 fiscal year at just over 4.5% of North Carolina’s gross domestic product.

As a share of the economy, state spending has averaged about 5.8% over the past 45 years. It was well over 6% as recently as 2009. Since fiscally conservative Republicans won control of the General Assembly in 2010, however, budgets have gone up every year in dollar terms but have gone down almost every year when expressed as a share of GDP.

That’s because legislative leaders have stuck to their commitment to keep annual spending growth at or below the combined rates of inflation and population growth. Since GDP usually grows faster than that, the result has been to shrink the size and scope of state government. That has, in turn, allowed legislators to rebuild the state’s savings reserves, pay off state debt, and finance several rounds of growth-enhancing tax cuts.

There’s no “voodoo economics” here. Our tax cuts have likely boosted economic growth, to be sure, but not fast enough to produce a net revenue gain. The reason the state budget remains in surplus is that lawmakers have maintained spending discipline. There is every reason to believe they’ll continue to do so.

When the General Assembly changed hands in 2010, the state had accumulated state debts totaling about $8,000 per North Carolinian, according to a watchdog organization called Truth in Accounting. Some of that debt was on-the-books debt, the result of past bond issuances or of borrowing from Washington to fund unemployment-insurance benefits. And some of that debt represented an unfunded liability for state benefits owed to public employees upon retirement.

By 2020, North Carolina’s debt burden had tumbled to $1,400 per person — a dramatic improvement. While we still need to shore up the health plan for state employees and retirees, our state now ranks 14th on Truth in Accounting’s fiscal health index. If present trends continue, we’ll soon reach the top 10.

Are conservatives in state government more principled and committed than their counterparts in Congress and the executive branch? Quite possibly, but I don’t think that’s the main reason Raleigh (and some other state capitals) have gotten it right and Washington has gotten it so very wrong.

The divergence reflects the critical importance of rules and institutions. In North Carolina and nearly all other states, legislators and governors are required by their constitutions to enacted balanced budgets. While borrowing for capital needs is permissible and sometimes prudent, states generally aren’t allowed to finance operating expenses with debt. The federal government, of course, has no such rule.

It ought to. In all future elections for Congress or the White House, I plan to vote only for candidates who pledge to support a balanced-budget amendment to the United States Constitution. Will you join me?

John Hood is a John Locke Foundation board member.

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