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Balanced Plans: Lessons from the Clinton Era



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“We lived within our means. We invested in our future. We asked everybody to pay their fair share. . . . The private sector thrived, jobs were created, the middle class grew — its income grew — millions rose out of poverty, we ran a surplus”

— President Obama, December 2, 2011

The president has a clear affection for the late 1990s. Economic growth was strong. Government was divided, but worked. The budget was balanced. What lessons does the 1990s have for the current plight of federal finances? What is the “balanced” plan — how much in spending cuts for each dollar of higher taxes — that the president is implicitly endorsing to return to those halcyon days?

Over the course of President Clinton’s administration (FY 1993–2000), federal spending averaged 19.8 percent of GDP — slightly below historical norms — while revenues averaged 19 percent — a bit above historical norms. This is close to a balanced budget, but still on average a deficit. However in the Golden Age — the surplus years of 1998–2000 — taxes averaged 20.1 percent of GDP, while spending checked in at 18.6 percent. These, then, are the guidelines for the federal government to strike the right balance between living within its means, investing in the future, and taxing fairly.

Contrast this with today: Revenues are 15.8 percent of GDP. Outlays are 22.8 percent of GDP. And we have tepid growth.

It is naïve to anticipate a rapid 4.3 percent-of-GDP tax hike or 4.2 percent-of-GDP spending cut. But a plan that gradually returns current revenues and spending trends to 1990s-era levels over ten years is far more achievable. But, timing aside, the lesson remains: The path to the president’s acknowledged glory days means higher revenue and significantly less spending.

How much of each?

The Congressional Budget Office (CBO) estimates that the president’s spending levels would be 22.8 percent of GDP in 2022, and that current policy would produce revenues of 18.5 percent. Accordingly, a gradual move to late-1990s budget levels by 2022 would require about $1.8 trillion in tax increases and $3.8 trillion in spending reductions over ten years.

That is, a “balanced” approach means over $2 of spending reduction for every dollar of taxes.

The president has repeatedly embraced half of the equation with his September 2011 “deficit reduction” plan that raised revenue by about $1.9 trillion over ten years, and his recent demands for $1.4 to $1.6 trillion in new revenues. The only thing missing is the spending restraint, or as the president noted, that critical element known as living “within our means.”

Where will the $3.8 trillion come from? CBO estimates that the president current plan will result in $12 trillion in discretionary spending over the next ten years. It seems exceedingly unlikely that national security, infrastructure, basic research, education, and the other demands for annual appropriations will be able to shoulder a nearly one-third cut. That means that the $28.6 billion in mandatory spending, i.e., entitlements, must be on the table as well. 

The lesson is clear. Clintonian balance means higher revenues. But it also means even greater spending reductions. And it demands entitlement reform.  



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