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GHEI: Kick the spending addiction

European stagnation proves taxes aren’t the solution

- The Washington Times - Wednesday, November 14, 2012

The United States is headed over the "fiscal cliff" while European capitals face austerity riots. Whether it's in Washington, Madrid, Rome or Athens, the heads of state will deny excessive public spending has anything to do with the ongoing malaise. Without accurately identifying the cause, the right solutions can't be implemented. So Europe's "austerity measures" invariably turn out to be tax increases, and the same misguided proposals are gaining momentum here.

The Continent remains mired in recession, with Greece leading the downward spiral on its sixth straight year of a contraction. The United States isn't far behind, with anemic growth, an official unemployment rate hovering near 8 percent and $1 trillion deficits for the foreseeable future. European Union countries are bound by law to keep deficits under 3 percent of gross domestic product (GDP) and have relied primarily on tax increases to close the gap. We should not make the same error.

Though economies are stagnant, governments are anything but. The French public sector has expanded to consume 56 percent of every euro generated in the private sector. That's up 3 points since the recession began in 2007, according to European Commission data. With the exceptions of Lithuania and Bulgaria, the public sector's share of GDP jumped in every EU country between 2007 and 2011. It's in the 50 percent range for many of the crisis-wracked countries.

If anything, the United States is in even worse shape. The federal government's share of our economic output has jumped from around 20 percent to 25 percent of GDP. According to the Congressional Budget Office, that number is set to rise to anywhere from 45 percent to 67 percent of GDP in the long run. This doesn't include the sizable share taken by state and local governments. Our deficits also are far higher than those of Greece or France at 8.5 percent of GDP.

The increasing share of government matters to growth. When the bureaucracy grows faster than the economy, it results in what Richard W. Rahn called "malinvestment" in an op-ed column in this paper on Tuesday. We saw that with the $833 billion stimulus, which left us with only debt. Increasing taxes now, whether on capital gains or on the so called "rich," will not only depress private investment and consumption, it will transfer more resources to the government to malinvest.

EU law is forcing French President Francois Hollande to consider cutting spending by all of 4 percent. If those spending cuts happen, they will follow wide-ranging tax hikes, including an increase in the value-added tax (VAT). In fact, the average VAT level has increased over the past four years in the EU, going up from 17.7 percent to 19 percent. Larger government and tax increases did not result in growth in France or any of the other countries. There is no reason to expect a different outcome on our shores. Our government needs to kick the spending habit, not extract more from citizens, if we are to return to sustained growth.

The Washington Times

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