Iowa Can Still Show D.C. What Fiscal Sanity Looks Like

Lawmakers at every level have control over how much the government spends. If our nation’s lawmakers need an example to emulate for good habits, though, Iowa can show them the playbook.

During the most recent debt ceiling drama in our nation’s capital, modest spending reductions were exchanged for an increase in the federal government’s borrowing limit. While that compromise is a step in the right direction, Washington is still a long way away from fiscal sanity.  When considering federal outlays as a percentage of our nation’s Gross Domestic Product (GDP), our nation has recently been spending at levels not reached since the 1940s.

At the height of COVID in 2020, United States spending matched World War II heights.  And while spending for FY2022 dropped slightly, the federal government still spent at levels higher than any other year of the post-war period at 25% of GDP.

Spending isn’t Washington’s only problem, either.   The federal government’s debt levels have skyrocketed too, as one might expect.  The nation is essentially carrying a credit card balance of more than $31 trillion, an amount just shy of 120% of GDP.  Clearly we are over our heads in debt.

The contrast with a fiscally responsible state like Iowa could not be more stark.  Washington consistently spends more money than it brings in. Lawmakers in Des Moines, on the other hand, not only balance the state’s budget, but they do so by spending significantly less than they could.

Here’s one example from the legislative session that just ended: Under Iowa law, legislators can spend up to 99 percent of available general fund revenue. In the budget that was passed for the upcoming fiscal year, Iowa’s General Assembly chose to spend just 88 percent of available revenue, meaning more dollars will stay in the bank accounts of Iowa families and businesses.

Another way to demonstrate Iowa’s fiscal sanity is to evaluate its spending policies against the “golden fiscal rule.”  Grounded in academic research and observations from multiple sovereign nations, the golden fiscal rule focuses on government spending instead of deficits and debt. In a nutshell, one economist summarized it perfectly saying policymakers should, “Ensure that government spending, over time, grows more slowly than the private economy. Evidence from economies around the world shows this is the best path to bring down deficits and nurture prosperity.”

In other words, a government should make certain that the private, or productive, sector of the economy is growing fast enough that its taxes and borrowing (which just means future taxes) don’t hamper economic growth.

We can use this rule to observe the difference between Iowa’s government and the federal government. Starting at the low point of the Great Recession in 2009, and measuring all the way through 2022, Iowa’s economy grew by an impressive 68.8%. Lawmakers increased spending of state funds during that same time period by just over 36%. That means, per the golden fiscal rule, that Iowa’s private economy grew faster than the government, generating a premium of 32.5 percentage points.

The entire U.S. economy, meanwhile, grew a bit faster than Iowa’s during those years, at nearly 76%. But federal spending grew more quickly, at 78.3%, meaning there was actually a private sector discount nationwide of over 2.4 points.

Even this comparison under-emphasizes the difference. That’s because the federal government spends more money during downturns; in 2009 its spending leaped by almost 18% compared to 2008. But the state government, which must balance its budget, cuts during lean times. Iowa’s spending fell by 11% from 2009 to 2010. 

At the end of the day, lawmakers at every level have control over how much the government spends.  It appears Washington, D.C. may remain a long way from being fiscally responsible, no matter what new spending changes are implemented. If our nation’s lawmakers need an example to emulate for good habits, though, Iowa can show them the playbook.

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