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Fiscal conservatism (also economic conservatism or conservative economics) is a political-economic philosophy regarding fiscal policy and fiscal responsibility advocating low taxes, reduced government spending and minimal government debt. Free trade, deregulation of the economy, lower taxes, and privatization are the defining qualities of fiscal conservatism. Fiscal conservatism follows the same philosophical outlook of classical liberalism and economic liberalism. The term has its origins in the era of the New Deal during the 1930s as a result of the policies of the initiated by reform or modern liberals, when many classical liberals started calling themselves conservatives as they did not wish to be identified with what was passing for liberalism.
In the United States the term liberalism has become associated with the welfare state and expanded regulatory policies created as a result of the New Deal and its offshoots from the 1930s onwards. Fiscal conservatives form one of the three legs of the traditional conservative movement in the United States, together with social conservatism and national defense conservatism. Many Americans who are classical liberals also tend to identify as libertarian, holding more socially liberal views and advocating a non-interventionist foreign policy while supporting lower taxes and less government spending.
- 1 Overview
- 2 History in the United States
- 3 Rest of the world
- 4 See also
- 5 Notes
- 6 References
- 7 Further reading
Fiscal conservatism is the economic philosophy of prudence in government spending and debt. Fiscal conservatives advocate the avoidance of deficit spending, the reduction of overall government spending and national debt, and ensuring balanced budgets. In other words, fiscal conservatives are against the government expanding beyond its means through debt, but will usually choose debt over tax increases.
[I]t is to the property of the citizen, and not to the demands of the creditor of the state, that the first and original faith of civil society is pledged. The claim of the citizen is prior in time, paramount in title, superior in equity. The fortunes of individuals, whether possessed by acquisition or by descent or in virtue of a participation in the goods of some community, were no part of the creditor's security, expressed or implied ... [T]he public, whether represented by a monarch or by a senate, can pledge nothing but the public estate; and it can have no public estate except in what it derives from a just and proportioned imposition upon the citizens at large.
Factions or subgroups
Although all fiscal conservatives agree generally on a smaller and less expensive government there are disagreements over priorities. There are three main factions or subgroups each advocating for a particular emphasis. Deficit hawks emphasize balancing government budgets and reducing the size of government debt and view government debt as economically damaging and morally dubious since it passes on obligations on to future generations who have played no part in present-day tax and spending decisions. Deficit hawks are willing to consider tax increases if the additional revenue is used to reduce debt rather than increase spending.
A second group put their main emphasis on tax cuts rather than spending cuts or debt reduction. Many embrace supply-side economics, arguing that as high taxes discourage economic activity and investment, tax cuts would result in economic growth leading in turn to higher government revenues. These additional government revenues, would in the long term reduce debt, they also argue for reducing taxes even if it were to lead to short term increases in the deficit. Some supply-siders have even advocated that the increases in revenue through tax cuts make drastic cuts in spending unnecessary. However, the Congressional Budget Office has consistently reported that income tax cuts increase deficits and debt and do not pay for themselves. For example, the CBO estimated that the Bush tax cuts added about $1.5 trillion to deficits and debt from 2002-2011 and would have added nearly $3 trillion to deficits and debt over the 2010-2019 decade if fully extended at all income levels.
A third group makes little distinction between debt and taxes, this group emphasizes reduction in spending rather than tax policy or debt reduction. They argue that the true cost of government is the level of spending not how that spending is financed. Every dollar that the government spends is a dollar taken from American workers, regardless whether it is from debt or taxes. Taxes simply redistribute purchasing power, doing so in a particularly inefficient manner, reducing the incentives to produce or hire and borrowing simply forces businesses and investors to anticipate higher taxes later on.
History in the United States
18th and 19th centuries
The Democratic-Republican Party of Thomas Jefferson supported a weak central government and a more laissez-faire approach than that of the Federalist Party of Jefferson's rival Alexander Hamilton. They opposed Hamilton's plan to pay off the debts owed by the states for the expense of the American Revolution, because some of the debt was held by financiers and speculators (rather than the original holders) and because most of the debt was held by northern states. Hamilton passed his legislation and set up taxes to pay the debts. In exchange, he agreed to let Jefferson move the nation's capital to Washington, D.C.
Jefferson strongly opposed having any national debt, but he relented in 1803 for the sake of the Louisiana Purchase. James Madison and James Monroe were elected by the Democratic-Republican Party, but after the fiscal disasters of the War of 1812, they came to support most Federalist positions and decided that the nation needed a central bank and a steady income flow from tariffs.
Early to mid 20th century
In the early 20th century fiscal conservatives were often at odds with progressives who desired economic reform. During the 1920s, President Calvin Coolidge's pro-business economic policies were credited for the successful period of economic growth known as the "Roaring Twenties." His actions, however, may have been due more to a sense of federalism than fiscal conservatism: Robert Sobel notes, "As Governor of Massachusetts, Coolidge supported wages and hours legislation, opposed child labor, imposed economic controls during World War I, favored safety measures in factories, and even worker representation on corporate boards."
The conservative economic and fiscal policies of Herbert Hoover are often popularly contrasted with the New Deal deficit spending of Franklin D. Roosevelt, and Republican Party opposition to Roosevelt's government spending was a unifying cause for a significant caucus of Republicans through even the presidencies of Truman and Eisenhower. Barry Goldwater was a famous champion of both the socially and fiscally conservative Republicans.
Fiscal conservatism was rhetorically promoted during the presidency of Ronald Reagan (1981–1989). During Reagan's tenure, the top personal income tax bracket dropped from 70% to 28%, while payroll taxes and the effective tax rates on the lower two income quintiles increased. Real GDP growth recovered strongly after the 1982 recession, growing at an annual rate of 3.4% for the rest of his time in office. Unemployment dropped after peaking at over 10.7% percent in 1982, and inflation decreased significantly. Federal tax receipts nearly doubled from $517 billion in 1980 to $1,032 billion in 1990. Employment grew at about the same rate as population.
According to a United States Department of the Treasury nonpartisan economic study, the major tax bills enacted under Reagan caused federal revenue to fall by an amount equal to roughly 1% of GDP. By the end of Reagan's second term, the national debt held by the public increased by almost 60%, and the total debt equalled $2.6 trillion. In fewer than eight years, the U.S. went from being the world's largest creditor nation to the world's largest debtor nation.
In the 1992 Presidential election, Ross Perot, a successful American businessman, ran as a third-party candidate. Despite significant campaign stumbles, and the uphill struggles involved in mounting a third-party candidacy, Perot received 18.9% of the popular vote (the largest percentage of any third-party candidate in modern history), largely on the basis of his central platform plank of limited-government, balanced-budget fiscal conservatism.
While the mantle of fiscal conservatism is most commonly claimed by Republicans and libertarians, it is also claimed in some ways by many centrist or moderate Democrats who often refer to themselves as "New Democrats". Although not supportive of the wide range tax cut policies that were often enacted during the Reagan and Bush administrations, the New Democrat coalition's primary economic agenda differed from the traditional tax and spend philosophy held among liberal Democrats and sided with the fiscal conservative belief that certain things needed to be cut in order to balance the federal budget. Former President Bill Clinton, who was a New Democrat and part of the somewhat fiscally conservative Third Way advocating Democratic Leadership Council, is a prime example of this as his administration along with the Democratic-majority congress of 1993 passed on a party-line vote the Omnibus Budget Reconciliation Act of 1993 which cut government spending, created a 36% individual income tax bracket, raised the top tax bracket, which encompassed the top 1.2% earning taxpayers, from 31% to 39.6%, and created a 35% income tax rate for corporations. The 1993 Budget Act also cut taxes for fifteen million low-income families and 90% of small businesses. Additionally, during the Clinton years, the PAYGO (pay-as-you-go) system originally introduced with the passing of the Budget Enforcement Act of 1990 (which required that all increases in direct spending or revenue decreases be offset by other spending decreases or revenue increases and was very popular with deficit hawks) had gone into effect, and was used regularly until the system's expiration in 2002.
In the 1994 midterm elections, Republicans ran on a platform that included fiscal responsibility drafted by then-Congressman Newt Gingrich called the Contract with America, which advocated such things as balancing the budget, providing the president with a line-item veto, and welfare reform. After the elections gave the Republicans a majority in the House of Representatives, newly minted Speaker of the House Gingrich pushed aggressively for reduced government spending, which created a confrontation with the White House that climaxed in the 1995–1996 government shutdown. After Clinton's re-election in 1996, they were able to cooperate and pass the Taxpayer Relief Act of 1997, which lowered the top capital gains tax rate from 28% to 20% and the 15% rate to 10%.
After this combination of tax hikes and spending reductions, the United States was able to create budget surpluses from fiscal years 1998-2001 (the first time since 1969), and the longest period of sustained economic growth in United States history.
Modern fiscal conservatism in the United States
American businessman, politician, and former Mayor of New York City, Michael Bloomberg, considers himself a fiscal conservative and expressed his definition of the term at the 2007 British Conservative Party Conference:
"To me, fiscal conservatism means balancing budgets – not running deficits that the next generation can't afford. It means improving the efficiency of delivering services by finding innovative ways to do more with less. It means cutting taxes when possible and prudent to do so, raising them overall only when necessary to balance the budget, and only in combination with spending cuts. It means when you run a surplus, you save it; you don't squander it. And most importantly, being a fiscal conservative means preparing for the inevitable economic downturns – and by all indications, we've got one coming."
The NYT reported in July 2018 that: "The top-earning 1 percent of households — those earning more than $607,000 a year — will pay a combined $111 billion less this year in federal taxes than they would have if the laws had remained unchanged since 2000. That’s an enormous windfall. It’s more, in total dollars, than the tax cut received over the same period by the entire bottom 60 percent of earners." This represents the tax cuts for the top 1% from the Bush tax cuts and Trump tax cuts, partially offset by the tax increases on the top 1% by Obama.
Rest of the world
As a result of the expansion of the welfare state and increased regulatory policies by the Roosevelt administration beginning in the 1930s, the term liberalism in the United States today has become associated with modern rather than classical liberalism. In Western Europe, however, the expanded welfare states created after the Second World War were created by socialist or social democratic parties such as the British Labour Party rather than liberal parties. As a result, many liberal parties in Western Europe tend to adhere to classical liberalism, the Free Democratic Party in Germany being one example. The Liberal Democrats in the UK have a classical and a social liberal wing of the party. In many countries liberalism or neoliberalism is used to describe what Americans call fiscal conservatism.
Fiscal conservatism in the UK was arguably most popular during the premiership of Margaret Thatcher, who, after a number of years of deficit spending under the previous Labour government, advocated spending cuts and selective tax increases to balance the budget. In 2010, as a result of the deterioration in the UK's public finances—according to fiscal conservatives caused by another spate of deficit spending under the previous Labour government, the late-2000s recession and by the European sovereign debt crisis—the Liberal Democrat-Conservative Coalition embarked on an austerity programme, featuring a combination of spending cuts and tax rises, in an attempt to halve the deficit and completely eliminate the structural deficit over the five-year parliament.
In Canada, the rise of the socialist Co-operative Commonwealth Federation (CCF) pushed the Liberal Party to create and expand the welfare state before and after World War II. Fiscal conservatism in Canada is generally referred to as Blue Toryism when it is present within the Conservative Party of Canada. In Alberta, social conservatism is represented by the Wildrose Party.
- Balance of payments
- Balance of trade
- Classical liberalism
- Criticisms of welfare
- Economic freedom
- Economic liberalism
- Market economy
- Right-wing politics
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