Kevin McCarthy is rumored to have promised many things to Republican hardliners on his way to his position as speaker of the US House of Representatives. One is a “balanced budget” for 10 years.
As part of the plan, Republicans are demanding massive spending cuts and budget reforms in exchange for lifting the debt ceiling this year – putting the US at risk of default.
But look at the numbers – and history – shows just how difficult balancing the budget will be.
Doing so requires the federal government to generate enough revenue to pay for all of its spending. The US has managed this feat only twice in the past 60 years – and both times involved raising taxes, something Republicans don’t like. President Lyndon B. Johnson succeeded in doing so in 1969, and President Bill Clinton created a surplus that ran from fiscal years 1998 to 2001, when he left office.
As a member of the Clinton administration in the Department of Commerce from 1997 to 2001, I participated in achieving that rare balanced budget and understand the obstacles to deliver repeat performance. A quick look back at how we did it, along with how much has changed, shows that the Republicans are unlikely to manage the same performance.
How Clinton balanced the budget
When Clinton took office in 1993, the previous year’s budget deficit was less than 5% of gross domestic product, and the nonpartisan Congressional Budget Office predicted a bleak fiscal outlook.
Clinton’s balanced budget recipe is a mix of higher revenues and lower spending, with the help of a growing economy. In his second term, he also negotiated a bipartisan budget deal with Republicans.
After campaigning on a promise to reduce the deficit, Clinton raised taxes on the wealthy during her first year in office. He introduced higher personal income tax brackets, raised corporate taxes, increased taxes on Social Security benefits, added 4.3 cents per gallon to the gas tax and eliminated several tax breaks. On the spending side, Clinton took advantage of the “peace dividend” that followed the collapse of the Soviet Union to reduce defense spending from 4.3% of GDP in 1993 to 2.9% in 2000.
These measures helped reduce the overall deficit to 1.3% of GDP by the end of Clinton’s first term. The youngest in 22 years.
Higher taxes led to the retreat of the Republicans, who won majorities in the House and Senate in 1995. Clinton constantly wrangled with Republican Speaker Newt Gingrich, who forced a government shutdown that same year.
As part of the budget negotiations, Congress finally passed the Balanced Budget Act of 1997, which retained Clinton’s original tax increase but cut capital gains taxes and reduced spending on Medicare and Medicaid. Meanwhile, the economy, fueled by the technology boom, grew rapidly during Clinton’s second term.
Higher tax rates for the wealthiest Americans, strong economic growth and continued restraint in government spending resulted in a budget surplus of US$69 billion in 1998. The surplus peaked in 2000 at $236 billion before falling to $128 billion in 2001. The surplus – which has not been seen since – allowed the US to pay off the national debt of more than $ 450 billion.
Lesson for today
The lesson for Republicans today is that if they are serious about balancing the budget, it will require some uncomfortable choices.
On the spending side, so-called entitlements — mandatory programs such as Social Security, Medicare and veterans benefits — now account for nearly two-thirds of the federal budget, compared to less than half when Clinton took office. Funding for the program is regulated by a formula, making it difficult to change. And the population of Americans 65 or older has grown 32% since 1993, increasing the demand for rights.
Defense spending takes another 14% of taxpayer dollars, well beyond every other item in the so-called discretionary budget, which includes everything from transportation and energy to airline traffic control and national parks.
The US spends 8% of its budget just paying interest on the national debt. This percentage has not changed much, but the debt has increased from $ 4.5 trillion in 1993 to $ 31 trillion today mainly due to the large tax cuts during the Bush and Trump administrations, the expensive wars in Iraq and Afghanistan and large public spending to overcome the 2008 financial crisis. and the COVID-19 pandemic.
Now that historically low interest rates are over, the US will be forced to give up a bigger slice of the pie to pay interest.
The policy nonprofit Committee for a Responsible Federal Budget recently estimated that if spending on defense, veterans, Social Security and Medicare were off the table, Congress would have to cut all other spending by 85% to achieve overall balance. In other words, simple arithmetic means that it is impossible to achieve anything close to a balanced budget without addressing the military and entitlement spending programs.
Cutting military spending is always controversial — and many Republicans (as well as some Democrats) will oppose the cuts — but especially as the U.S. seeks military aid to Ukraine and the Pentagon perceives threats from China. It is the exact opposite of the peace dividend of the Clinton era.
Eliminating mandatory spending would require significant reform. The US has one of the youngest minimum retirement thresholds in the world, at age 62, compared to 65 in Canada and 67 in the UK and Germany. Even France may have a higher minimum retirement age of 64 – although the current protests there to increase it from 62 reflect the political dangers of such a change.
Can he do it again?
Of course, there is an opportunity to close the gap between income and spending.
The Congressional Budget Office has released a report outlining 76 options for reducing the deficit. But many of the ideas require tougher choices, such as returning some or all of the last tax cuts, increasing taxes on the wealthy, ending or reducing tax cuts and implementing a value-added tax based on consumption or a carbon tax, as well as fundamental reforms to entitlement programs.
Unfortunately, Congress has shown limited appetite to address the issue.
Back in 1997, after the smoke cleared, the Clinton administration and Republicans in Congress could claim some political credit for the resulting budget surplus. But – most importantly – both parties recognize that the deal is in the best interest of the country and can apply their respective members to get the votes in Congress needed to approve it. The contrast with today’s political landscape is stark.
The Republican Study Committee, a bloc of more than 160 conservative lawmakers, published a budget blueprint in June 2022 that promises to balance the budget within seven years. The plan proposes trillions of dollars in spending cuts, many of which will hit low-income Americans the hardest. These include shrinking Medicaid, giving veterans benefits and raising the age for full Social Security retirement benefits from 67 to 70. It also calls for more military spending and more tax cuts — which would require even more draconian cuts to core safety net programs.
It would also lock in Trump’s tax cuts in 2017 — the opposite of what the Congressional Budget Office recommends or what Clinton did in the 1990s to secure a balanced budget.
Without a credible Republican deficit-cutting plan on the table, I believe the chances are that it will stall at the debt ceiling, which could send the U.S. economy into recession.
While Congress seems unlikely to allow a debt default, this fight will waste time and energy that could be used to figure out how to strengthen programs like Social Security and close tax loopholes that reduce incomes.
Balancing the budget is not the end. Most economists agree that governments should reduce public debt during periods of prosperity and deficits to help people when the economy is weak.
The US was fortunate in the late 1990s to enjoy a good economy that allowed Congress and the president to run fiscal surpluses. What the country needs now, in my view, is not more speed, but a sustainable path to stabilize the national debt. That requires a lot of profit and reducing non-essential spending in a responsible way.
Linda J. Bilmes is the Daniel Patrick Moynihan Senior Lecturer in Public Policy and Public Finance, Harvard Kennedy School.
This article is republished from The Conversation under a Creative Commons license. Read the original article.