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Lawmakers should follow the ‘golden rule’ of budgeting

Viewpoint

If state leaders ever hope to revitalize Hawaii’s economy, they need to follow the “golden rule” of budgeting: Make sure government does not grow faster than the economy.

That would leave more money for Hawaii residents to invest in new businesses, buy new homes, afford college educations for their children and generally accumulate capital essential to a sustainable, prosperous economy.

At the moment, Hawaii is struggling because of the financial depression brought on by the COVID-19 lockdowns. But even before the coronavirus crisis, our lawmakers were driving us toward the precipice, overseeing more than a decade of state spending that outpaced economic growth. Apparently thinking the good times would never end, they increased taxation and debt to record-high levels.

In other words, the economic calamity we now face did not start with the coronavirus lockdowns; it was already upon us thanks to failed fiscal policies. The coronavirus crisis was the straw that broke the camel’s back.

As of fiscal 2019, before the COVID-19 crisis, Hawaii’s gross domestic product was tanking at minus 0.5 percent, the lowest GDP rate in the nation, according to data from the U.S. Bureau of Economic Analysis. For the entire decade ending in fiscal 2019, state general fund spending averaged 3.6 percent, compared to the state’s GDP growth of 1.7 percent. Such spending breached the state’s constitutional spending limit by $1.5 billion, and along the way overloaded us with excessive government payroll costs and tens of billions of dollars of unfunded liabilities.

Unfortunately, in the wake of the Great Lockdown Crash of 2020, our state lawmakers still are using the playbook that counsels greater spending, higher taxation and increased debt. Even after receiving $1.6 billion in federal COVID-19 relief funds, they seem committed to their old habits, proposing that only some of the windfall money be used to pay down debts while using the rest to avoid state employee furloughs and other government spending cuts.

Our policymakers need a new playbook, a “road map to prosperity,” that advises fiscal restraint, a lighter tax burden and fewer hurdles to opportunity and initiative.

We need to forego new megaprojects such as the Aloha Stadium and ALOHA homes proposals, and scale back existing boondoggles such as the Honolulu rail. We also could cut costs by contracting with the private sector to manage the state’s hospitals, airports and other public operations and services.

Other ways to spur economic productivity would be to reform or repeal rules that limit occupational freedom, disincentivize entrepreneurship, discourage vacation rentals, restrict homebuilding, complicate interisland shipping, require “certificate of need” laws for new medical facilities and otherwise suppress economic initiative and productivity.

With economic growth, lawmakers would see their tax coffers refill. That’s because the underappreciated beauty of fostering economic growth is that over time it painlessly increases tax revenues without new taxes.

Unfortunately, the strings attached to the $1.6 billion windfall from the feds won’t let the state lower taxes for at least four years, unless they are offset by reduced spending. That’s actually not such a bad demand. But if we can’t figure out a way to cut taxes, at least let’s not increase them. Entrepreneurs love regulatory certainty, so a policy of “no new taxes” would be very inviting to anyone looking to invest in Hawaii.

Bottom line: Hawaii needs to reduce government spending, rein in taxation, pay off debt and rebuild its rainy day fund, if we wish for it to recover and prosper. That would all result from the golden rule of budgeting, which is to make sure government does not grow faster than our economy.

* Keli’i Akina, Ph.D., is president and CEO of the Grassroot Institute of Hawaii.

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