Fiscal conservatism

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Fiscal conservatism (also economic conservatism or conservative economics) is a political-economic philosophy regarding fiscal policy and fiscal responsibility advocating low taxes, reduced government spending and minimal government debt. [1] Free trade, deregulation of the economy, lower taxes, and privatization are the defining qualities of fiscal conservatism. Fiscal conservatism follows the same philosophical outlook of classical liberalism and economic liberalism. [2] The term has its origins in the era of the New Deal during the 1930s as a result of the policies initiated by reform or modern liberals, when many classical liberals started calling themselves conservatives as they did not wish to be identified with what was passing for liberalism. [3]

Fiscal policy use of government revenue collection and spending to influence the economy

In economics and political science, fiscal policy is the use of government revenue collection and expenditure (spending) to influence the economy. Fiscal policy is often used to stabilize the economy over the course of the business cycle.

Free trade policy in which countries governments do not restrict imports from, or exports to, other countries

Free trade is a trade policy that does not restrict imports or exports; it can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold liberal economic positions while economically left-wing and nationalist political parties generally support protectionism, the opposite of free trade.

Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider economy.

Contents

In the United States the term liberalism has become associated with the welfare state and expanded regulatory policies created as a result of the New Deal and its offshoots from the 1930s onwards. [4] Fiscal conservatives form one of the three legs of the traditional conservative movement in the United States, together with social conservatism and national defense conservatism. [5] Many Americans who are classical liberals also tend to identify as libertarian, [6] holding more socially liberal views and advocating a non-interventionist foreign policy while supporting lower taxes and less government spending. [5]

Social conservatism in the United States

Social conservatism in the United States is a political ideology focused on the preservation of traditional values and beliefs, hearkening back to values believed to be present at the American founding. It focuses on a concern with moral and social values which proponents of the ideology see as degraded in modern society by social democracy and liberalism. Social conservatism, while defined differently by many scholars, is often conflated with the Christian right. Many religious conservatives push for a focus on Judeo-Christian traditions as a guiding force for the country on social issues, leading them to be considered social conservatives. Social conservatives are concerned with many social issues such as abortion, sex education, the equal rights amendment, school prayer, same-sex marriage, and many others. They oppose many of the cultural changes brought on by the culture wars and the sexual revolution. Summarily, this branch of conservatism is concerned with moral and social issues within the United States and uses tradition, strict morals, and religion as solutions for these problems.

Non-interventionism or non-intervention is a foreign policy that holds that political rulers should minimize relations with other nations but still retain diplomacy and trade, while avoiding wars unless related to direct self-defense. A 1915 definition is that non-interventionism is a policy characterized by the absence of "interference by a state or states in the external affairs of another state without its consent, or in its internal affairs with or without its consent".

Overview

Principles

Fiscal conservatism is the economic philosophy of prudence in government spending and debt. [7] Fiscal conservatives advocate the avoidance of deficit spending, the reduction of overall government spending and national debt, and ensuring balanced budgets. In other words, fiscal conservatives are against the government expanding beyond its means through debt, but will usually choose debt over tax increases.

Deficit spending Spending in excess of revenue

Deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. Government deficit spending is a central point of controversy in economics, as discussed below.

Government spending government consumption, investment, and transfer payments

Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment. These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.

Balanced budget Financial plan where revenues equal expenses

A balanced budget is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists. More generally, it is a budget that has no budget deficit, but could possibly have a budget surplus. A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time.

Edmund Burke, in his Reflections on the Revolution in France , argued that a government does not have the right to run up large debts and then throw the burden on the taxpayer:

Edmund Burke 18th-century Anglo-Irish statesman and political theorist

Edmund Burke was an Irish statesman born in Dublin, as well as an author, orator, political theorist and philosopher, who after moving to London in 1750 served as a member of parliament (MP) between 1766 and 1794 in the House of Commons with the Whig Party.

<i>Reflections on the Revolution in France</i> 1790 Edmund Burke political book

Reflections on the Revolution in France is a political pamphlet written by the Irish statesman Edmund Burke and published in November 1790. One of the best-known intellectual attacks against the French Revolution, Reflections is a defining tract of modern conservatism as well as an important contribution to international theory. Above all else, it has been one of the defining efforts of Edmund Burke's transformation of "traditionalism into a self-conscious and fully conceived political philosophy of conservatism".

[I]t is to the property of the citizen, and not to the demands of the creditor of the state, that the first and original faith of civil society is pledged. The claim of the citizen is prior in time, paramount in title, superior in equity. The fortunes of individuals, whether possessed by acquisition or by descent or in virtue of a participation in the goods of some community, were no part of the creditor's security, expressed or implied ... [T]he public, whether represented by a monarch or by a senate, can pledge nothing but the public estate; and it can have no public estate except in what it derives from a just and proportioned imposition upon the citizens at large.

Factions or subgroups

Although all fiscal conservatives agree generally on a smaller and less expensive government there are disagreements over priorities. [5] There are three main factions or subgroups each advocating for a particular emphasis. Deficit hawks emphasize balancing government budgets and reducing the size of government debt, viewing government debt as economically damaging and morally dubious since it passes on obligations on to future generations who have played no part in present-day tax and spending decisions. [5] Deficit hawks are willing to consider tax increases if the additional revenue is used to reduce debt rather than increase spending. [5]

Deficit hawk is a political slang term in the English speaking world for people who place great emphasis on keeping government budgets under control. 'Hawk' can be used to describe someone calling for harsh or pain-inducing measures in many political contexts; in the specific context of deficit reduction, the term is more commonly applied to those advocating for cuts in government spending than to those supporting increases in taxes.

A second group put their main emphasis on tax cuts rather than spending cuts or debt reduction. Many embrace supply-side economics, arguing that as high taxes discourage economic activity and investment, tax cuts would result in economic growth leading in turn to higher government revenues. [5] These additional government revenues, would in the long term reduce debt, they also argue for reducing taxes even if it were to lead to short term increases in the deficit. [5] Some supply-siders have even advocated that the increases in revenue through tax cuts make drastic cuts in spending unnecessary. [5] However, the Congressional Budget Office has consistently reported that income tax cuts increase deficits and debt and do not pay for themselves. For example, the CBO estimated that the Bush tax cuts added about $1.5 trillion to deficits and debt from 2002-2011 [8] and would have added nearly $3 trillion to deficits and debt over the 2010-2019 decade if fully extended at all income levels. [9]

Supply-side economics Macroeconomic theory

Supply-side economics is a macroeconomic theory arguing that economic growth can be most effectively created by lowering taxes and decreasing regulation, by which it is directly opposed to demand-side economics. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices and employment will increase.

Congressional Budget Office Government agency

The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government that provides budget and economic information to Congress. Inspired by California's Legislative Analyst's Office that manages the state budget in a strictly nonpartisan fashion, the CBO was created as a nonpartisan agency by the Congressional Budget and Impoundment Control Act of 1974.

The phrase Bush tax cuts refers to changes to the United States tax code passed originally during the presidency of George W. Bush and extended during the presidency of Barack Obama, through:

A third group makes little distinction between debt and taxes, this group emphasizes reduction in spending rather than tax policy or debt reduction. [10] They argue that the true cost of government is the level of spending not how that spending is financed. [5] Every dollar that the government spends is a dollar taken from American workers, regardless whether it is from debt or taxes. Taxes simply redistribute purchasing power, doing so in a particularly inefficient manner, reducing the incentives to produce or hire and borrowing simply forces businesses and investors to anticipate higher taxes later on. [10]

History in the United States

Early to mid 20th century

Herbert Hoover addresses a large crowd in his 1932 campaign. Hoover Campaign.jpg
Herbert Hoover addresses a large crowd in his 1932 campaign.

In the early 20th century fiscal conservatives were often at odds with progressives who desired economic reform. During the 1920s, President Calvin Coolidge's pro-business economic policies were credited for the successful period of economic growth known as the "Roaring Twenties." His actions, however, may have been due more to a sense of federalism than fiscal conservatism: Robert Sobel notes, "As Governor of Massachusetts, Coolidge supported wages and hours legislation, opposed child labor, imposed economic controls during World War I, favored safety measures in factories, and even worker representation on corporate boards." [11]

are often popularly contrasted with the New Deal deficit spending of Franklin D. Roosevelt, and Republican Party opposition to Roosevelt's government spending was a unifying cause for a significant caucus of Republicans through even the presidencies of Truman and Eisenhower. Barry Goldwater was a famous champion of both the socially and fiscally conservative Republicans.

Reagan era

Reagan spent the most of any recent President, measured as annual average % GDP. Federal Spending by President - Carter to Obama - v1.png
Reagan spent the most of any recent President, measured as annual average % GDP.

Fiscal conservatism was rhetorically promoted during the presidency of Ronald Reagan (1981–1989). During Reagan's tenure, the top personal income tax bracket dropped from 70% to 28%, [13] while payroll taxes and the effective tax rates on the lower two income quintiles increased. [14] [15] Real GDP growth recovered strongly after the 1982 recession, growing at an annual rate of 3.4% for the rest of his time in office. [16] Unemployment dropped after peaking at over 10.7% percent in 1982, and inflation decreased significantly. [17] Federal tax receipts nearly doubled from $517 billion in 1980 to $1,032 billion in 1990. Employment grew at about the same rate as population.

According to a United States Department of the Treasury nonpartisan economic study, the major tax bills enacted under Reagan caused federal revenue to fall by an amount equal to roughly 1% of GDP. [18] By the end of Reagan's second term, the national debt held by the public increased by almost 60%, and the total debt equalled $2.6 trillion. In fewer than eight years, the U.S. went from being the world's largest creditor nation to the world's largest debtor nation. [19]

Ross Perot

In the 1992 Presidential election, Ross Perot, a successful American businessman, ran as a third-party candidate. Despite significant campaign stumbles, and the uphill struggles involved in mounting a third-party candidacy, Perot received 18.9% of the popular vote (the largest percentage of any third-party candidate in modern history), largely on the basis of his central platform plank of limited-government, balanced-budget fiscal conservatism.

Clinton era

The Ominibus Budget Reconciliation Act of 1993 increased the average federal tax rates for the top 1%, while lowering average tax rates for the middle class. President Obama also raised tax rates for higher income persons starting in 2013, through the partial expiration of the Bush tax cuts. The Clinton and Obama tax increases lowered deficits relative to CBO policy baselines without them. Average US Federal Tax Rates 1979 to 2013.png
The Ominibus Budget Reconciliation Act of 1993 increased the average federal tax rates for the top 1%, while lowering average tax rates for the middle class. President Obama also raised tax rates for higher income persons starting in 2013, through the partial expiration of the Bush tax cuts. The Clinton and Obama tax increases lowered deficits relative to CBO policy baselines without them.

While the mantle of fiscal conservatism is most commonly claimed by Republicans and libertarians, it is also claimed in some ways by many centrist or moderate Democrats who often refer to themselves as "New Democrats". Although not supportive of the wide range tax cut policies that were often enacted during the Reagan and Bush administrations, [20] [21] the New Democrat coalition's primary economic agenda differed from the traditional philosophy held by liberal Democrats and sided with the fiscal conservative belief that a balanced federal budget should take precedence over some spending programs. [21] Former President Bill Clinton, who was a New Democrat and part of the somewhat fiscally conservative Third Way advocating Democratic Leadership Council, is a prime example of this as his administration along with the Democratic-majority congress of 1993 passed on a party-line vote the Omnibus Budget Reconciliation Act of 1993 which cut government spending, created a 36% individual income tax bracket, raised the top tax bracket, which encompassed the top 1.2% earning taxpayers, from 31% to 39.6%, and created a 35% income tax rate for corporations. [22] The 1993 Budget Act also cut taxes for fifteen million low-income families and 90% of small businesses. Additionally, during the Clinton years, the PAYGO (pay-as-you-go) system originally introduced with the passing of the Budget Enforcement Act of 1990 (which required that all increases in direct spending or revenue decreases be offset by other spending decreases or revenue increases and was very popular with deficit hawks) had gone into effect, and was used regularly until the system's expiration in 2002.

In the 1994 midterm elections, Republicans ran on a platform that included fiscal responsibility drafted by then-Congressman Newt Gingrich called the Contract with America, which advocated such things as balancing the budget, providing the president with a line-item veto, and welfare reform. After the elections gave the Republicans a majority in the House of Representatives, newly minted Speaker of the House Gingrich pushed aggressively for reduced government spending, which created a confrontation with the White House that climaxed in the 1995–1996 government shutdown. After Clinton's re-election in 1996, they were able to cooperate and pass the Taxpayer Relief Act of 1997, which lowered the top capital gains tax rate from 28% to 20% and the 15% rate to 10%.

After this combination of tax hikes and spending reductions, the United States was able to create budget surpluses from fiscal years 1998-2001 (the first time since 1969), and the longest period of sustained economic growth in United States history. [23] [24] [25]

Modern fiscal conservatism in the United States

Comparison of annual federal deficits (CBO 10-year forecast from prior to inauguration vs. the actual amount), during the Obama and G.W. Bush presidencies. Bush added far more to the debt relative to the CBO 2001 forecast than Obama added relative to the CBO 2009 forecast. CBO Forecast Comparison - Obama and GW Bush - v1.png
Comparison of annual federal deficits (CBO 10-year forecast from prior to inauguration vs. the actual amount), during the Obama and G.W. Bush presidencies. Bush added far more to the debt relative to the CBO 2001 forecast than Obama added relative to the CBO 2009 forecast.

American businessman, politician, and former Mayor of New York City, Michael Bloomberg, considers himself a fiscal conservative and expressed his definition of the term at the 2007 British Conservative Party Conference:

"To me, fiscal conservatism means balancing budgets – not running deficits that the next generation can't afford. It means improving the efficiency of delivering services by finding innovative ways to do more with less. It means cutting taxes when possible and prudent to do so, raising them overall only when necessary to balance the budget, and only in combination with spending cuts. It means when you run a surplus, you save it; you don't squander it. And most importantly, being a fiscal conservative means preparing for the inevitable economic downturns – and by all indications, we've got one coming." [26]

Rest of the world

As a result of the expansion of the welfare state and increased regulatory policies by the Roosevelt administration beginning in the 1930s, the term liberalism in the United States today has become associated with modern rather than classical liberalism. [4] In Western Europe, however, the expanded welfare states created after the Second World War were created by socialist or social democratic parties such as the British Labour Party rather than liberal parties. [4] As a result, many liberal parties in Western Europe tend to adhere to classical liberalism, the Free Democratic Party in Germany being one example. [4] The Liberal Democrats in the UK have a classical and a social liberal wing of the party. In many countries liberalism or economic liberalism is used to describe what Americans call fiscal conservatism. [4] [27] [2]

Fiscal conservatism in the UK was arguably most popular during the premiership of Margaret Thatcher, who, after a number of years of deficit spending under the previous Labour government, advocated spending cuts and selective tax increases to balance the budget. In 2010, as a result of the deterioration in the UK's public finances—according to fiscal conservatives caused by another spate of deficit spending under the previous Labour government, the late-2000s recession and by the European sovereign debt crisis—the Liberal Democrat-Conservative Coalition embarked on an austerity programme, featuring a combination of spending cuts and tax rises, in an attempt to halve the deficit and completely eliminate the structural deficit over the five-year parliament. [28]

In Canada, the rise of the socialist Co-operative Commonwealth Federation (CCF) pushed the Liberal Party to create and expand the welfare state before and after World War II. [4] Fiscal conservatism in Canada is generally referred to as Blue Toryism when it is present within the Conservative Party of Canada. [29] In Alberta, fiscal conservatism is represented by the United Conservative Party. [30] In Ontario, fiscal conservatism is represented by the Progressive Conservative Party of Ontario.

See also

US-specific

Notes

  1. Coates 2012, p. 392.
  2. 1 2 Johnston 2011, p. 210.
  3. Grigsby 2004, p. 99.
  4. 1 2 3 4 5 6 Fujii 2013, p. 541.
  5. 1 2 3 4 5 6 7 8 9 Coates 2012, p. 393.
  6. Grigsby 2004, p. 100.
  7. Freeman, Robert M. (1999). Correctional Organization and Management: Public Policy Challenges, Behavior, and Structure. Elsevier. p. 109. ISBN   978-0-7506-9897-9.
  8. "CBO Changes in CBO's Baseline Projections Since January 2001". CBO. June 7, 2012.
  9. "CBO Budget and Economic Outlook 2009–2019". CBO. Retrieved November 21, 2016.
  10. 1 2 Coates 2012, p. 394.
  11. Robert Sobel (1988). "Coolidge and American Business". Calvin-Coolidge.org. Retrieved May 14, 2015.
  12. CBO Historical Budget Data April 2018-Retrieved June 25, 2018
  13. Daniel J. Mitchell, Ph.D. (July 19, 1996). "The Historical Lessons of Lower Tax Rates". The Heritage Foundation. Retrieved May 22, 2007.
  14. "Social Security and Medicare Tax Rates". Social Security Administration. July 10, 2007.
  15. "Effective Federal Tax Rates: 1979–2001". Bureau of Economic Analysis. July 10, 2007.
  16. "Gross Domestic Product". Bureau of Economic Analysis. May 31, 2007.
  17. Ronald Reagan. Microsoft Corporation. 2007. Archived from the original on October 31, 2009. Retrieved July 27, 2007.
  18. Office of Tax Analysis. "Revenue Effects of Major Tax Bills" (PDF). 2003, rev. Sept 2006. United States Department of the Treasury. Working Paper 81, Table 2. Archived from the original (PDF) on November 22, 2010. Retrieved November 28, 2007.
  19. "Reagan Policies Gave Green Light to Red Ink". The Washington Post. June 9, 2004. Retrieved May 2, 2010.
  20. Stephen Chapman (July 22, 1993). "Clinton Won't Restore Punitive Taxation-not Today". Chicago Tribune. Retrieved January 27, 2014.
  21. 1 2 Timothy Nolan (October 17, 2012). "A Brief History Of "Trickle-Down Government"". Christian Science Monitor. Retrieved January 27, 2013.
  22. Steve Schifferes (January 15, 2001). "Bill Clinton's economic legacy". London: BBC News.
  23. Kelly Wallace (September 27, 2000). "President Clinton announces another record budget surplus". CNN.
  24. John King (May 1, 2000). "Clinton announces record payment on national debt". CNN.
  25. Brooks Jackson (February 3, 2008). "The Budget and Deficit Under Clinton". FactCheck.org.
  26. "Mayor Bloomberg Delivers Remarks At 2007 Conservative Party Conference". NYC.gov. September 30, 2007.
  27. Fujii 2013, p. 542.
  28. "Budget: Structural deficit to be balanced by 2015". Fund Strategy. June 22, 2010. Archived from the original on July 13, 2010. Retrieved November 22, 2010.
  29. Wolak, Arthur (2014). The Development of Managerial Culture: A Comparative Study of Australia and Canada. Springer. p. 199.
  30. Karen Kleiss (April 9, 2012). "Alberta election pits PC's 'red' versus Wildrose's 'blue' conservatives, experts say". National Post.

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References

Further reading