’Tis the budget season. Come February, provincial and federal governments will begin to unveil their fiscal intentions for the coming year. Special interests beware, there’s little money left in government coffers. Deficits are expected in many provinces and federal dollars are scarce. Yes, this budget season will be drastically different than those of budget seasons past. Most governments will proclaim that the current crunch is a result of reduced revenues from a slumping economy. Truth be told, the real culprits are governments themselves and their irresponsible spending increases. This is precisely the reason Canadians would be well advised to pressure their governments for Tax and Expenditure Limitation laws (TELs), which limit any increase in either government spending or taxation to a prescribed rate.

Canada enjoyed a particularly strong economy between 1997 and 2002. Strong economic growth translated into a healthy stream of revenues for the federal government and most provincial governments. History however, shows that governments have a hard time controlling spending when they are flush with revenue. The 2003 federal budget, for example, increased program spending by 11.5 percent, over twice the expected growth rate of the economy. Most provinces followed suit; Ontario increased program spending by 7.5 percent and Alberta by a troubling 8.0 percent. Increases of this magnitude are clearly not sustainable. Tax and expenditure limitations would ensure that government revenue and spending do not increase faster than the rate of inflation and population growth, unless specifically approved by citizens.

TELs have been implemented in many U.S. states. While the ultimate effect depends heavily on their design and implementation, research shows that, in general, they are effective at restraining the growth in government and ensuring future fiscal sustainability. In addition, TELs in the United States have held the government more accountable and have forced them to prioritize spending. The increased accountability that TELs provide reduces government spending driven by special interest.

To examine their effectiveness, it is useful to contrast Colorado’s experience with California’s. During the 1990s California was flush with revenues, the result of a thriving economy fueled by the technology boom. In fact, tax revenues increased by 108 percent from 1990 to 2001. Instead of reducing taxes and taking advantage of the opportunity to make California more competitive, former Governor Gray Davis began to rapidly accelerate state spending. In fact, government spending in California doubled in just seven years from 1994 to 2001. The tech collapse spelled fiscal disaster. Revenues plummeted and the government, unwilling to take the necessary steps to bring expenditures in line, created a budget deficit estimated at $35 billion.

On the other hand, in 1993, Colorado passed a constitutionally entrenched TEL that applies to both revenues and expenditure and limits increases to population growth plus inflation. Voters must approve any new or increase in taxes, except for certain emergency taxes. In addition, revenue exceeding a prescribed threshold must be refunded to taxpayers, which in turn has created an enormous incentive for politicians in Colorado to be more proactive in reducing taxes.

The results in Colorado have been remarkable. Colorado experienced similar increases in state revenues to California throughout the 1990s. Unlike California however, Colorado’s Tax and Expenditure Limitation law forced its government to reduce taxes and return budget surpluses to taxpayers in the form of rebates. In fact, Colorado reduced taxes more than any other state between 1997 and 2002. As a result, Colorado’s economy remains healthy, no fiscal crisis is looming, and its citizen’s enjoy one of the highest average per person disposable incomes among the U.S. states. In addition, Colorado recorded the seventh highest rate of in-migration in the U.S. between 1995 and 2000.

Canadian governments are currently facing slowing revenues, largely a result of our sluggish economy. To maintain Canada’s fiscal discipline and avoid the risks of future deficits, Canadian provinces would be well served to follow the likes of Colorado and enact constitutionally entrenched Tax and Expenditure Limitation laws.