Balancing the Budget

Balancing the Budget

Balancing the Budget

A cheat sheet for the news.
Nov. 16 1996 3:30 AM

Balancing the Budget

In 1995, the budget battle between President Clinton and the Republican Congress shut down the government. In 1996, the Republicans--who got blamed for the shutdown--more or less surrendered to the president on budget specifics. Clinton, meanwhile, has embraced the principle of balancing the budget by the year 2002. As he pointed out relentlessly during the campaign, the deficit has shrunk by 60 percent in the past four years. He suggested in his Nov. 10 interview with David Brinkley that going the rest of the way will be easy. The Republican leadership also talks as though it will be easy. Will it?

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In fact, eliminating the deficit shouldn't be hard--at least on paper. The task is easier partly because of legislative successes over the past two years. Agriculture and welfare programs have been reformed in ways that will save money, and discretionary spending was cut vigorously in fiscal 1996. There were reverses after the Republican surrender of 1996, but they were minor. The failure to cut taxes also helps. But Clinton and the Republicans are mainly the beneficiaries of pure dumb luck.

In January 1995, the Congressional Budget Office projected the fiscal 1996 deficit at $207 billion. It came in at $107 billion. Only a small part of the improvement is the result of congressional deficit-cutting. Most of it is the result of estimating errors by CBO. Some might say, "Fire the estimators," but, believe it or not, a $100 billion error is not very large in a $7.5 trillion economy. CBO overestimated outlays by about 4 percent and underestimated receipts by about 2.5 percent. These may not be very accurate forecasts for a two-year period, but they are far from incompetent.

The causes of the errors are not yet well understood. Much of the revenue surge may have been capital-gains-tax revenues associated with the surging stock market--and many others besides CBO wish they had forecast that. Outlays were down because of lower-than-expected interest rates and a mysterious reduction in the growth of Medicaid spending. But Medicaid spending has begun to surge again in recent months. The good news was short-lived, as it usually is for Medicaid.

How hard it will be to come up with an agreed-upon path to a balanced budget depends on how the CBO adjusts its projections for 2002. The lesson of the huge 1996 mistake might seem to be that budget projections are futile--but the CBO has no choice but to project, and Congress has no choice but to accept that projection as gospel. In any event, the new CBO projections should make the budget-balancing task easier for the president and Congress, although we do not know how much easier.

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Given the intense budget struggles of the past, why does balancing the budget now look easier? First, as noted earlier, we have been nibbling away at the deficit. The much-maligned budget deal of 1990, fashioned by President Bush and Congress, helped a lot, as did the equally maligned 1993 deal constructed by President Clinton. But more important, the turn of the century should be a Golden Age for the budget.

With luck, in 2002, we should still be enjoying an enormous peace dividend from the end of the Cold War. Another long-fuse blessing is the low birth rate during the Great Depression. Over half of the civilian, noninterest budget goes to people over 65, and that group will be growing slowly at the turn of the century. Last, CBO will have little choice but to assume the continuation of full employment. There is no recession in sight, and it would be foolish to try to forecast the timing of one more than a year in the future.

Given all these favorable factors, it might be possible to devise a credible balanced-budget plan that involves only minor cuts in Medicare, Medicaid, and discretionary spending--were it not for the tax cuts desired by both the president and the Republicans. The tax cuts may force them to put some implausible spending cuts on paper. If the final plan involves significant, unspecified cuts in real discretionary spending--and if most of those cuts occur in 2001 and 2002, when Bill Clinton will be a man of leisure--we should all be suspicious. It will be very difficult to cut discretionary spending much further. Defense spending will soon be flattening out, and domestic discretionary spending proved highly resilient at the end of the last Congress, as members facing re-election became much more conservative.

Arecession at any time in the next five years also would add greatly to the difficulty. In fact, an economic downturn of any significant size would destroy efforts to balance the budget in 2002, and could push the deficit back toward $200 billion.

However, the much more serious budget problem involves what happens after 2002. The good news about the near future will be bad news for the long run if it leads the president and Congress to put forward a plausible balanced-budget plan without beginning the dramatic Medicare, Medicaid, and Social Security reforms that are required to avoid an economic catastrophe soon after 2010, when baby boomers will retire. At that time, without reform, the deficit will soar to unimaginable levels. The private savings necessary to finance the deficit will plummet, because there will be net withdrawals from private pension funds. The two forces will cause us to eat away at our capital, and the economy will head rapidly downward.

Clinton and the Republicans are right: Balancing the budget by 2002 will be (relatively) easy. It's afterward that the trouble starts.