The Budget Is Balanced—Not!
This article is from the March/April 1998 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/1998/0398breslow.html
This article is from the March/April 1998 issue of Dollars & Sense magazine.
Rejoice, rejoice, the deficit is gone—three years before the 2002 deadline set by the balanced budget agreement! So says Bill Clinton's proposed budget, which predicts that in fiscal 1999 the federal government's deficit would fall to zero, and that surpluses would appear in the years to follow.
In contrast to both Clinton and the Republicans, most liberal-to-left economists argue that moderately-sized deficits don't cause significant damage in the first place, so the rejoicing is misplaced. The real harm comes from making a balanced budget the nation's primary goal—which conservatives have used as an excuse to slash vitally needed spending on social and regulatory programs.
In any case, this year's close-to-balanced budget is a mirage, because it includes the current surplus in the Social Security trust fund. Moreover, remaining in balance and achieving a surplus in the future depends on a continuing economic boom—an unlikely prospect.
Suppose, in contrast to the White House's method, that we leave Social Security, which is considered an "off-budget" program, out of the calculation. The "on-budget" deficit will remain at $105 billion in 1998, falling to $69 billion in 2002, before rising again, says the Congressional Budget Office (CBO). Only the "unified" budget, which includes Social Security, balances during the next few years, before showing rising surpluses in 2001 and beyond, according to the CBO (Clinton's Office of Management and Budget—OMB—predicts higher surpluses, by assuming slower growth in Medicare spending and in the Consumer Price Index, and lower unemployment rates).
Yet Social Security is intentionally running large surpluses at present, to prepare for the baby-boom retirement crunch beginning around the year 2008. "The primary reason for moving Social Security off-budget was to protect its annual surpluses and make it easier to fund the baby-boom generation's retirement. The best way to meet future needs is to exclude the Social Security surpluses from any calculation of budget surpluses," said an unusual coalition of advocacy groups, ranging from the left (Center on Budget and Policy Priorities) to the right (Cato Institute), in a December letter to Clinton.
Several Republican leaders, such as Senate Majority Leader Trent Lott, have called for taking this opportunity to legislate further tax cuts. Clinton, to his credit, argues that no tax cuts should be considered until the Social Security problem is solved.
Meanwhile, the aging population will also mean rapidly rising spending on Medicare and Medicaid. By 2010, combined spending on Social Security and Medicare will rise from its current 7% of Gross Domestic Product to 9%, growing further to 11% in 2020, estimated the CBO in March 1997 (before the boom economy caused CBO to issue more optimistic forecasts). As a result, the "unified" deficit will rise to 20% of total federal spending in the year 2020.
Besides this long-run problem, whether the deficit disappears or not in the short-run depends greatly on the economy. In February 1997 OMB predicted that the Fiscal 1998 "unified" deficit would be $121 billion, $111 billion less than its current estimate of $10 billion. Why the difference? Rapidly growing GDP, unemployment well lower than anyone expected a year ago, and a rampaging bull on Wall Street.
But this could all turn around quickly. "A recession of average depth and duration could transform a balanced budget into one with a $100 billion to $150 billion deficit," says Robert D. Reischauer, the most recent former director of CBO.
The astounding gains on Wall Street have also helped make the deficit disappear, says the CBO. Rising stock prices cause capital gains to grow, leading to higher federal revenues from capital gains taxes. Of course, there is a growing consensus that the Wall Street boom has run its course, and that prices will now grow slowly at best, while at worst the market could be heading for a crash. The result would be a sharp drop in capital gains tax revenues.
It is true that due to the balanced-budget law, in 2002 the "unified" federal budget will be forced into balance, regardless of what state the economy is in. How will this be accomplished? One way would be tax increases, but neither the Democrats nor the Republicans want this solution. The other way is to reduce spending; yet under current law "mandatory" programs, of which Social Security and Medicare are the largest, are exempt from budget cuts. As a result, the burden of wiping out the deficit will continue to fall on "discretionary" spending, such as that for poverty programs, job training, education, transportation, and environmental regulation. This, of course, is exactly what conservatives want, and by accepting the balanced-budget premise, Bill Clinton continues to aid and abet them.