A Secret Ingredient For Economic Growth: Spending Limits

By MICHAEL AUSTIN | Lecturer | Washburn University School of Business

Should the government be run like a business? The Topeka Capital-Journal recently highlighted several interesting findings from the local business community, which shed some light on the answer.

A survey of more than 100 Topeka business leaders shows that most are optimistic about their businesses: they plan to hire more workers, invest in capital and grow sales. However, they are far less hopeful about the broader local, state and national economies, citing inflation, stagnant development and rising interest rates as hurdles.

These findings aren’t unique to Topeka. The 2024 Nationwide Insurance Economic Impacts Survey found that 72% of small business owners nationwide rate the overall economy as “poor” or “fair,” yet still view their prospects favorably.

So, why the dissonance? Why do metrics arguably in the control of entrepreneurs seem to be improving, while metrics more conceivably influenced by government policy are trending in the wrong direction?

BUSINESS VS. GOVERNMENT OPERATIONS

This entrepreneurial sentiment may reflect a fundamental difference between small businesses and government operations. Topeka businesses thrive because they operate with efficiency and accountability. Meanwhile, inflation, high interest rates and depressed development persist because, by and large, the government doesn’t follow the same principles.

Economist Milton Friedman explained it best: In the private sector, businesses that fail to innovate or satisfy customers go out of business. Entrepreneurs face constant pressure to deliver value, whereas government entities are insulated from failure. If a government program underperforms, it often gets more funding, not less. Governments lack a feedback mechanism like the price system, which continuously signals value and forces businesses to adapt or die.

In business, prices reflect customer satisfaction and efficiency. Consumers would never pay $1,000 for ramen noodles or $20 for a car. Private markets set prices based on supply and demand, constantly adapting to what consumers want and businesses can afford. Government programs, however, are funded by tax revenues, which everyone must pay, and are judged by elections rather than direct feedback on efficiency or performance.

Consider this: Government spending has consistently outpaced population growth and inflation over the past few decades. Between 1970 and 2020, the Congressional Budget Office reports that federal spending grew by over 9% annually, compared to population growth (1.6%) and inflation (3.8%). Meanwhile, a 2024 United States Department of Commerce report states that private sector GDP growth — the engine of wealth creation — lagged behind government expansion. In other words, government policy led to price hikes because too many dollars were injected into the economy at a faster rate than the production of goods and services.

Inflation isn’t just a number in a report — it’s a real challenge for entrepreneurs managing operational costs and wages. Government spending policies, left unrestrained, can make borrowing more expensive and reduce the available capital for business investment. Every business owner knows how thin margins can get when costs rise uncontrollably. Imagine that same pressure amplified across all industries in an entire state or nation. The more resources the government consumes, whether through taxes or borrowing, the fewer that are left for businesses to innovate, expand and hire.

It’s no wonder why small businesses have such a pessimistic view of the economy. To fix this, governments cannot rely on price signals like the private sector. However, they can adopt a golden rule of fiscal policy: the private sector must grow faster than government spending.

To do that, the government needs a spending limit. It should not be a blunt or arbitrary limit that threatens the quality of government services, but it should be based on the understanding that the role of the private sector is to generate wealth, and that the public sector should allocate that wealth as necessary.

Think of it like a smart thermostat for the economy. Just as a thermostat keeps your home from getting too hot or too cold, a spending limit adjusts government growth based on key economic indicators like inflation, population growth and private sector economic activity. This ensures the government footprint remains manageable and doesn’t bite the private sector hand that feeds it.

Just as a thermostat keeps your home from getting too hot or too cold, a spending limit adjusts government growth based on key economic indicators like inflation, population growth and private sector economic activity.

A SPENDING LIMIT POLICY APPROACH

In Kansas, this approach could have helped avoid the 2017 tax hikes that resulted from an imbalance of revenues and spending. A 2024 report by the Kansas Policy Institute shows that over the past decade, Kansas spending grew by an average of 6.3% annually, outpacing inflation, population growth and the expansion of Kansas’s private industries. Meanwhile, Kansas businesses and families are shouldering thousands of dollars in extra costs due to inflation, and rising taxes are pushing residents to lower-tax states.

If Kansas had implemented a spending limit, the state could have maintained a more business-friendly environment. This would lead to consistent budget surpluses, allowing Kansas to reduce or eliminate state income taxes. A lower tax burden would attract new businesses, encourage in-migration and create a more affordable, dynamic environment for living and doing business.

Other countries have tried spending limit measures with varying degrees of success. Switzerland ties its spending to “potential GDP,” which has helped control the national debt since 2003, and surveys show high public satisfaction with this system1. Chile also adopted a voluntary spending limit from 2000 to 2011, where even the policy announcement improved the country’s credit rating2. From 2001 to 2005, economic volatility in Chile declined significantly3.

In the U.S., this approach is catching on. Colorado’s Taxpayer’s Bill of Rights (TABOR) restricts state revenues to an aggregation of population growth and inflation, requiring voter consent to exceed that limit. Texas and Utah have also tied government spending to population growth and inflation. A literature review on municipalities shows that one in every eight cities has a self-imposed spending limit. Moreover, the review found that cities with spending limits experience slower revenue growth without significant negative impacts on welfare outcomes4.

TWO STEPS TO MAKE A SPENDING LIMIT POLICY WORK:

1: The government should cap spending based on private industry growth, population growth or similar metrics.
2: In deficit years, government spending growth slows. In surplus years, it rebounds, following businesses over economic cycles.

THE PATH TO EFFICIENCY

In Topeka and across the nation, while small businesses are leading the way with innovation and growth, the government’s inability to follow similar principles undermines the economic environment. Entrepreneurs know how to run a business efficiently and, by working with customers, they find solutions that benefit everyone. It’s time for governments to follow their lead.

1 Grier, A. (2011). The Debt Brake - The Swiss Fiscal Rule at the Federal Level. Federal Finance Administration, 32.
2 Fort, G. L. (2006). Structural Fiscal Policies to Target in the Chilean Experience. Latin American Debt Management Specialists, 69.
3 Frankel, J. A. (2011). A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile. National Bureau of Economic Research.
4 Brooks, L., Halberstam, Y., & Philips, J. (2012). Spending Within Limits: Evidence from Municipal Fiscal Restraints. National Tax Journal, 67.