Balancing Act: Not So Fast -- Here Comes the Budget Crunch
By PETER PASSELL
President Clinton displayed
his deft political touch last week, calling for the first balanced
budget in three decades and in the process taking credit for solving a problem that has
dogged Washington since the early years of the Reagan administration.
How much credit
he actually deserves is a matter of dispute. For while the green eye-shade
crowd is effusive in praising the tax increases and spending trims that President Clinton
engineered in 1993, the improved fiscal outlook is a product of a variety of factors ranging from
the stock market boom to the lower prices of imports from deflation-wracked Asia.
"Think of it
as the reverse of Murphy's Law," suggests Rudolph Penner,
a former director of the Congressional Budget Office who is now a
senior fellow at the Urban Institute. "Everything that could go right has
the real test of fiscal leadership for Clinton and his
successors may be how they manage the good times ahead. For while
there are solid reasons to believe that the budget will remain in surplus
for a decade or more, the retirement of the baby boomers is certain to
push the budget deeply into the red soon thereafter unless Washington
acts preemptively to curtail the future cost of Social Security and
"The future still
looks terrible, but the day of reckoning has been
postponed by a decade or more," said Robert Reischauer, another
former Budget Office director who is now at the Brookings Institution.
A glimmer from
the end of the deficit tunnel was first spotted in 1990,
when President George Bush broke his campaign pledge and acceded
to a tax increase. A second round of deficit cutting in 1993 also made a
big difference, as has the Midas touch of the Federal Reserve in managing monetary policy.
But the pace
of deficit reduction, accelerated by the coincidence of stable growth,
inflation, exceptionally low unemployment and off-the-charts tax receipts, caught virtually
everyone by surprise.
the Congressional Budget Office forecast a $34 billion deficit in 1997
rise to $57 billion in 1998 and return to balance only in 2002. Last week the Budget Office
revised the 1997 deficit estimate down to just $22 billion and projected a $5 billion surplus for
1998 -- a $62 billion swing in four months without any changes in federal spending or tax policy.
have repeatedly had to play catch-up since the beginning of 1996," marveled
Doorn Ooms, director of research at the Committee for Economic Development.
Good news begats
more good news. The quicker return to budget surplus means a smaller
national debt down the road, along with lower interest rates and smaller annual interest payments
to service the debt. It now appears that the "baseline budget" -- one that assumes no changes in
fiscal policy -- will remain in surplus until 2012.
At that point,
the retirement of the first wave of aging baby boomers, who are entitled
generous Social Security and Medicare benefits, will darken the budget picture. But Reischauer
points out that the ratio of federal debt to gross domestic product, arguably the most objective
measure of the burden of the debt, will probably continue to fall, with debt declining from the
current level of 48 percent of GDP to just 20 percent in 2015.
And while the
baseline-budget deficit will grow steadily after 2012, it is not expected
back to the 1992 magnitude (3.8 percent of GDP) until 2028.
Slippage is possible
-- make that, likely -- between now and then. Clinton has already proposed
invest a chunk of the prospective surplus in day care services, while House Speaker Newt
Gingrich is appealing to conservative Republicans with calls for "at least a small tax cut every
year" when the budget is in the black.
By the same token,
even a modest stumble from the straight and narrow path of low inflation
2 percent-plus economic growth would reduce projected revenues and ratchet up spending on the
social safety net. Moreover, said H. Erich Heineman, an economic consultant in New York, "If
there's a serious recession, you can forget about surpluses."
But the deeper
fear among economists is that budget bliss will persist well into the next
undermining the sense of urgency in rethinking how the nation will pay for the retirement of the
baby boomers. For while the prognosis has brightened considerably since fiscal reformers first
warned of the coming demographic tsunami, there is still big budget trouble ahead.
In 1991, the
economists Alan Auerbach, Jagadeesh Gokhale and Lawrence Kotlikoff estimated
that Americans born after 1994 would have to fork over an astonishing 84 percent of their wages
to deliver on the nation's promises to the old. A recalculation, expected to be published this year,
is likely to reduce this anticipated tax burden to around 50 percent.
But this would
still be a remarkable stretch compared with the estimated 30 percent lifetime
tax rate -- taxes paid less government pensions and medical care received -- on Americans born
in the 1930s and 1940s.
economist at Boston University, put it another way. To create an actuarial
between future revenues and promised government benefits, he estimated that personal and
corporate income tax rates would have to be raised by 20 percent right now and kept at the
higher rates indefinitely.
Waiting a decade
or two to act, of course, would drastically increase the cost of the fix.
idea that the problem is solving itself simply ignores fiscal reality," Kotlikoff argued.
Penner is tentatively
optimistic that policy makers will be able to deal rationally with distant
inevitable demographic change, even as they celebrate the current respite from deficit-driven
politics of fiscal scarcity. "I'm very impressed with how the idea of Social Security and Medicare
reform has entered mainstream debate," he said.
But that is asking
a lot from officials trained by voters to focus on the present, lest there
future. "It will be several political lifetimes until Washington again faces a budget crisis,"