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The Budget Picture

January 3, 1997



President Clinton has recently been making some "big picture decisions" about the composition of the federal budget that he will submit to Congress on Feb. 3.

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One decision almost certainly is to present a budget that projects a balance by 2002. The November election results, putting Republicans again in control of Congress, make that a near necessity.

Balance is a desirable goal, not so much because the deficit at its current level is economically damaging but because the government should bring restraint to the growth of entitlements, particularly Medicare.

In the fiscal year that ended Sept. 30, the deficit was about $107 billion, the smallest since 1981. With 3 percent inflation, the loss in value of the $3.7 trillion of outstanding federal debt just exceeds that deficit. So, in real terms, the federal account is, for now at least, already in balance.

Nonetheless, without any steps to restrain spending, the deficit will grow again. Economists at DRI/McGraw-Hill, a Lexington, Mass., consulting firm, predict a deficit this fiscal year of $125 billion. That reflects an increase in federal outlays of 5 percent, up from 2.9 percent in fiscal 1996. And, according to DRI, receipts should grow only 4.2 percent. The impact of the 1993 tax hike on personal incomes, mostly on the well-to-do, will not be so great. Nor are corporate income tax revenues likely to grow as much as in the last two years.

DRI expects the deficit to begin falling again in fiscal 1998, but not below $100 billion. That projection assumes Congress passes a small personal tax cut in 1997, paid for by tightening eligibility requirements for various welfare programs and minor changes in Medicare.

In comparison with earlier decades, the spending numbers of today are extraordinarily modest. Croesus has turned into Scrooge. Discretionary spending this year will rise less than 1 percent in nominal terms. Federal purchases of goods and services, after taking account of inflation, will decline 1.5 percent in fiscal 1997 and 2.5 to 3 percent annually through the rest of the decade. Defense spending will take the brunt of this decline. But even nondefense purchases will be falling in real terms.

Whether Congress actually tackles Medicare spending, as assumed in a minor way by DRI, remains to be seen. The lower deficits remove some of the pressure on Congress to deal with such politically sensitive matters.

During the election, Mr. Clinton and the trade unions successfully painted the Republicans as the party itching to cut the benefits of seniors. Thus the Republicans in Congress likely will insist that the Clinton budget lead the way on Medicare spending restraint. Probably the president will make a cautious proposal. That will be progress.

As for a balanced budget constitutional amendment, if it should clear the 105th Congress it probably won't get enough state ratifications to take effect. Many state governments will be wrestling with financial burdens resulting from the 1996 welfare reform law. They won't want to risk having Washington, straitjacketed by a new constitutional clause, shove other federal spending responsibilities onto their backs.