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My 20th Theorem of Government is based on the very simple – but empirically rigorous – premise that the key fiscal variable is spending growth.
If government is restrained, there are inevitably good outcomes.
If government grows rapidly, there are inevitably bad outcomes.
My only positive examples of spending restraint have been Greece and the Netherlands. And in the case of Greece, I was grading on a curve since I was highlighting a five-year period where spending grew too fast (more than 4 percent annually), but at least there was progress since the country was obeying my Golden Rule.
Every other examples I’ve shared has been bad news. Profligate politicians in France, Brazil, Colombia, Maryland, Washington, Australia, Germany, and Canada have created major problems for their jurisdictions with reckless expansions in the burden of government.
Today, we’re going to consider another example of bad fiscal policy. In this case from Southeastern Europe.
Though not everyone will agree with me. Here’s are some snippets from the IMF’s just-released report on Bulgaria.
…the revenue-generating capacity of the flat-tax regime appears insufficient to meet increasing demands for quality services. In the medium term, more revenues could be raised by increasing tax rates for both personal and corporate income and moving to progressive income taxation. …the pay-as-you-go pension system…can be strengthened by increasing contribution revenues, including by removing the cap on income subject to contributions.
This makes it seem as if the problem in Bulgaria is insufficient taxation.
So I decided to investigate if this is true. I went to the IMF’s big database (which presumably was easily accessible for the bureaucrats who wrote the report) to see what’s actually been happening in Bulgaria.
Lo and behold, the big fiscal development in the country is that there’s been a reckless increase in the burden of government spending. Over the past eight years, outlays have risen by an average of nearly 13 percent annually. That’s nearly three times faster than needed to keep pace with inflation.
Government spending also grew faster than GDP, so Bulgaria has been violating my Golden Rule.
But here’s the worst part: The net result is that government spending is now consuming nearly 39 percent of economic output compared to 32 percent of GDP in 2017.
By the way, during the same period, the tax burden rose by nearly three-percentage points of GDP. And the country went from budget surplus to budget deficit.
So there’s no (honest) way to argue that Bulgaria’s problem is inadequate taxation.. The problem is that government is too big and growing too fast. Yet the IMF bureaucrats are recommending even-higher taxes to finance even-higher spending.
Predictable, but still disappointing.
P.S. In addition to checking the IMF’s own database, the bureaucrats who wrote the report should have also checked with the bureaucracy’s economics department. They could have learned about research showing that bigger government hurts prosperity. Indeed, there’s similar research from other left-leaning international bureaucracies such as the ECB, World Bank, and OECD.
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Image credit: Dennis Jarvis | CC BY-SA 2.0.
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