Being a glass-half-full kind of guy, I look for kernels of good news when examining economic policy around the world. I once even managed to find something to praise about French tax policy. And I can assure you that’s not a very easy task.
I particularly try to find something positive to highlight when I’m a visitor. While in the Faroe Islands two days ago, for instance, I wrote about that jurisdiction’s new system of personal retirement accounts.
And now that I’m in Iceland, I want to focus on spending restraint.
As you can see from this chart, lawmakers in this island nation have done a reasonably good job of satisfying Mitchell Golden Rule over the past couple of years. Economic output has been growing by 6.1 percent annually, while government spending has risen by an average of 2.8 percent per year.
If Iceland continues to enjoy this level of growth and can maintain this modest degree of fiscal discipline, the burden of government spending will soon drop below 40 percent of GDP.
As I’ve noted before, fiscal progress can occur very rapidly if spending is curtailed. Consider what’s happened, for example, over the past two years in America. Total federal spending didn’t grow in 2011 or 2012, and that de facto two-year spending freeze has led to a big reduction in the size of the public sector relative to GDP.
And because policymakers addressed the underlying disease of excessive spending, it’s no surprise that the symptom of red ink became much less of a problem with the deficit falling by almost 50 percent in those two years.
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