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The Adam Smith Institute Blog

Pass a law to stop government overspending

The UK and US seem to spend money as if there were a limitless supply. But Germany and most US states have laws to keep the government budget balanced.

By James PatonGuest blogger / March 29, 2011

A trader on the trading floor at IG Markets looks at his screen as Britain's Chancellor of the Exchequer, Alistair Darling, delivers his budget speech, in London March 24, 2010. Could a law be passed to keep government spending in check?

Andrew Winning / Reuters / File

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The government spends money like there is no tomorrow – mainly because it is not their money but ours. This is most clearly seen in the enormous deficit run over the last few years. What could we do to avoid these budget deficits in future? In democracies that have written constitutions, balanced budget amendments have been proposed and have succeeded. This could work well in Britain.

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In 2009, the German constitution was amended to stop the federal and state governments from running budget deficits. The plan in Germany has been set over an eleven-year period. From 2016, governments won’t be able to run a deficit of more than 0.35% of GDP and from 2020 a deficit won’t be allowed to run at all. In America, 49 states have some form of a balanced budget provision (the exception is Vermont). In Oregon, the law forbids a state surplus of more than 2% of GDP. If there is one, anything above this threshold is refunded to taxpayers. The Federal government does not have a cap on its spending at all, but there have been various balanced budget proposed. This has been brought to Congress within the 1991-1992, 2001-2002 and 2005-2006 sessions. These have failed due to the difficulty to pass amendments, which needs a two-thirds majority in both houses in Congress and three-quarters of states ratifying it.

The UK, like the US Federal Government does not have a balanced budget amendment. Parliament can pass a law without a supermajority as an act of parliament, only needing a simple majority. If there was a balanced budget bill, it will need to be like the German amendment. It will need to phase out deficits over a period of time and by the end of the time allocated, the Chancellor cannot spend more than he gets in, just like a normal household budget.

Obviously, Parliament can repeal a law just as easily as it can enact it – but experience has shown that this can be quite difficult for governments. At the very least, the law would be a roadblock to deficit spending. By passing a law banning deficits, we may see our government finances being put into place.

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