In a recent column I wrote on our budget problems, I discussed some of the efforts Canada — which has outperformed the United States economically in recent years — took in the 1990s to turn around a massive deficit and debt problem. Recently, The Economist had an interesting story on yet another country that — at least when it comes to effectively managing its economy by reducing spending — deserves an examination. It’s the tiny nation of Estonia.
What it lacks in size and population, Estonia has long made up for in policy innovation and economic progress. Impoverished when it declared independence from the Soviet Union in 1991, Estonia’s prime minister believes his country is now on course to become one of the wealthiest countries in Europe.
Estonia has for years been one of the most consistent advocates of market-based policies, and has posted robust economic growth. For instance, it was one of the first countries in the world to adopt a flat income tax. Given its strong economic performance, Estonia’s government recently announced plans to lower that flat tax to just 20 percent. By contrast, here in the U.S., those making average incomes
and above progressively pay between 25 and 35 percent.
And yet, even with this much lower rate of income taxation, Estonia boasts a budget surplus and the lowest debt load in the European Union. In fact, its debt is among the lowest in the entire world. How can that be?
By keeping government spending to a manageable level, the private sector is able to expand into more sectors of the economy; and, by keeping income and corporate taxes low, those businesses are able to grow, hire more workers and provide more revenue to the government.
Yet, like President Obama and his party, there are many in Europe who do not believe in Estonia’s approach. Just look at two of Estonia’s European Union partners: Spain and Italy. Both of these countries are notorious for their tax-and-spend policies.
Today, Spain’s debt is equal to about 60 percent of its economy and Italy’s is almost double that, at close to 120 percent. As a result, both of these countries keep inching closer to a Greek-style debt crisis and are now being forced to take significant — and deeply unpopular — steps to stave off bankruptcy. And while Estonia posted an impressive economic growth rate of 8.5 percent in the first quarter of 2011 — the highest in the EU — the economies of Spain and Italy have remained largely stagnant.
Under President Obama, we have also taken a very different policy approach than the Estonian model. Accordingly, our growth rate in the first quarter was just 1.5 percent. As for our debt, we will soon owe an amount equal to our entire economy, while Estonia will owe almost none.
And yet, we keep spending and spending: $1 trillion on President Obama’s failed stimulus bill, $2 trillion on ObamaCare, and billions more on other massive increases in government programs. In fact, federal spending jumped to 25.3 percent of GDP this year, a 22 percent increase in just three years. But it’s just not working; rather than create jobs, these policies have actually put 2.1 million more Americans out of work.
Like the discussion on Canada, I’m not suggesting we simply replicate the policy model of Estonia. For example, I do not agree with certain changes Estonia made to its tax system. However, Estonia’s approach to reduced spending and living within its means is something that deserves close examination.
It’s time to try a different approach here. Let’s begin to implement policies that encourage economic growth, job creation and deficit reduction — even if that means taking a pointer or two from abroad. We certainly can’t do worse than President Obama’s disastrous big-government, tax-and-spend approach.