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Fiscal conservatism is a political term used to describe a fiscal policy that advocates avoiding deficit spending. Fiscal conservatives often consider reduction of overall government spending and national debt as well as ensuring balanced budget of paramount importance. Free trade, deregulation of the economy, lower taxes, and other conservative policies are also often but not necessarily affiliated with fiscal conservatism.
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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.
In the mid-19th century, a new fiscal conservative political party emerged, the Republican Party. Unlike the modern fiscal conservatives, these fiscal conservatives were paleoconservative supporters of protectionism and tariffs, similar in some ways to today's Reform Party.
They were also generally supporters of big business and (internally) laissez-faire economics, although by 1890 they had been convinced into supporting Sherman Anti-Trust Act and the Interstate Commerce Commission following massive complaints.
In the early 20th century fiscal conservatives were often at odds with progressive
During the 1920s President Calvin Coolidge's pro-business economic policy 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 that "[a]s 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."
Fiscal Conservatism was rhetorically promoted during the presidency of Ronald Reagan (1981–1989). During Reagan's tenure, income tax rates of the top personal tax bracket dropped from 70% to 28% in 7 years,[1] while payroll taxes increased as well as the effective tax rates on the lower two income quintiles.[2][3] Real Gross domestic product (GDP) growth recovered strongly after the 1982 recession and grew during Reagan's remaining years in office at an annual rate of 3.4% per year,[4] slightly lower than the post-World War II average of 3.6%.[5] Unemployment peaked at over 10.7% percent in 1982 then dropped during the rest of Reagan's terms, and inflation significantly decreased.[6] Federal tax receipts nearly doubled from $517 billion in 1980 to $1,032 billion in 1990. A net job increase of about 16 million also occurred (about the rate of population growth).
According to a United States Department of the Treasury non-partisan economic study, the major tax bills enacted under Reagan, as a whole, significantly reduced (~-1% of GDP) government tax receipts.[7] The Economic Recovery Tax Act of 1981 was a massive (~-3% of GDP) decrease in revenues (the largest tax cuts ever enacted)[8] By the end of Reagan's second term the national debt held by the public ballooned from 26 percent of the GDP in 1980 to 41 percent in 1989. By 1988, the debt totaled $2.6 trillion, in part because of both increased military spending at the end of the Cold War and according to some, the tax cuts. The country owed more to foreigners than it was owed, and the United States moved from being the world's largest international creditor to the world's largest debtor nation.[9]
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 by many centrist or moderate Democrats who often refer to themselves as "New Democrats". Former President Bill Clinton, who was a New Democrat and part of the 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.[10] 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 reduce the $3.8 trillion public debt by $360 billion and create the largest federal budget surplus ($236 billion in fiscal year 2000) as well as the longest period of sustained economic growth in United States history.[11][12] However, the claimed surplus was only recorded against public debt which was calculated with the exclusion of intragovernmental holdings. This meant that the administration was able to record loans deducted from the social security trust fund as revenue on budget reports, which accounted for the bulk of the surplus money. The total national debt (gross federal debt) rose every year of the Clinton Administration from $4.3 trillion to $5.6 trillion and from $5.4 trillion to $5.6 trillion over the years where the surplus was claimed.[13]
The combination of lower revenue due to an economic recession and massive tax breaks, increased domestic spending on social welfare programs, and increased defense spending in the wake of 9/11 caused the U.S. to slip back to deficits in the early 21st century. The subsequent Obama administration, dealing with decreasing revenues, further increased government spending during the recession, increasing U.S. budget deficits.
Modern fiscal conservatives remain wary of government spending. They believe strongly in free trade and are committed to lowering the federal budget, paying off national debt, and acquiring a balanced budget.[14] Where fiscal conservatism gets more diverse in ideals is what steps should be taken to balance the budget. Deficit hawks are more willing to increase taxes in addition to cutting spending to balance the budget than libertarians, who want to "starve the beast" by cutting taxes for the purpose of decreasing tax revenue which they hope will cause the government to spend less, and supply-siders, who believe the best way to gain tax revenue is through deep across-the-board tax cuts that they believe will end up completely paying for themselves through the economic growth they cause.[15][16]
American businessman, politician, and current Mayor of New York City, Michael Bloomberg, considers himself a fiscal conservative and expressed his definition of the term at the 2007 United Kingdom Conservative Party Conference.
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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. --Michael Bloomberg[17] |
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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.
More recently, in reaction to the Late-2000s recession, the subsequent deterioration in the UK's public finances, and to a lesser degree the 2010 European sovereign debt crisis, the Liberal Democrat-Conservative Coalition embarked on an austerity programme in an attempt to halve the deficit, and completely eliminate the structural deficit[18] over the five-year parliament.
Fiscal conservatism become popular during the Howard government where large importance was placed on first balancing the budget and then running consistent surpluses to pay down the debt that had been taken on by Keating Government in response to the early 1990s recession. In first term of government Howard made large cuts to government expenditure by laying off employees, and reducing social spending. Throughout his term of office Howard used the surplus budgets that he achieved as an example of his good economic credentials and that referring to the deficits that had been run under the previous labor government as an example of bad economic management.
US specific: