The Republican leadership of Congress and President Bill Clinton
have released the initial details of their plan to balance the
federal budget by 2002 and provide modest tax cuts for hardworking
Americans. Each new detail that comes out, however, confirms that
this is a deal based on $300 billion in questionable assumptions
that mask a substantial growth in the size and scope of the federal
government. Moreover, while the President's agenda is revealed
explicitly in the documents accompanying the agreement, the
congressional agenda is left largely up to the imagination.
Taxpayers are being asked to accept bigger government in exchange
for the promise of a "balanced budget" and a small cut in their
The real test of a balanced budget plan is whether it actually
leads to smaller, less costly government and leaves more money in
the pockets of working families. The available evidence shows that
this budget deal fails on nearly every count and that, in most
cases, the policies it reflects may be worse than doing
Take spending. The deal will usher in a major increase in new
spending, especially discretionary outlays. Some examples:
- Discretionary spending will balloon by at least $96 billion
above current levels over the next five years, starting with as
much as $8 billion in new spending in FY 1998.
- While the congressional leadership agreed to $30 billion in new
White House initiatives, they received no commitment to eliminate
any wasteful program in exchange. At a minimum, the elimination of
programs such as the National Endowment for the Arts, the Legal
Services Corporation, and AmeriCorps should be the price for any
increased spending levels.
- The deal also will erase all of the savings achieved in last
year's landmark welfare reform legislation. The agreement includes
about $22 billion in spending for new children's health care
initiatives, welfare benefits for legal aliens, and food stamp
recipients, in addition to a $37 billion bailout of private owners
of low-income housing.
- The reported $115 billion in Medicare savings will stem the
growth of these programs only modestly over the next five years
while doing nothing to promote any fundamental restructuring. The
Medicare deal includes a home health care accounting change that
has been widely condemned as inviting a surge of new spending, in
addition to which the price controls included in the plan would
lead to worse care for Medicare recipients.
By contrast, taxpayers will have to settle for a tax cut that
seems to move in the right direction while actually doing little to
roll back government:
- The tax measures would return less than one cent of every
dollar they send to Washington over the next five years.
- Taxpayers will receive just 67 cents in tax cuts for every
dollar of new spending earmarked for White House and congressional
In short, based on the data released thus far, the White House
and Republican leaders in Congress have negotiated a "balanced
budget" plan that is not in the best interests of the American
people. The only way to improve it now is by dramatically
increasing the size of the tax cut package, eliminating the
proposed new taxes, holding the line on new domestic spending, and
including provisions that eliminate specific programs and reform
entitlements. These flaws must be corrected early in the process if
the agreement is to have any credibility.
Even if lawmakers took these steps, however, serious questions
would remain. For instance, will the deal have any measurable
impact on the FY 1998 budget, or will it simply "back-load" the
hard work for future lawmakers? And since the deal is built on the
shaky foundation of questionable economic assumptions, what
enforcement mechanisms will lawmakers adopt to ensure that spending
is controlled should the rosy claims now being made by the
President and the congressional leadership fail to materialize?
Fundamental Flaws of the Deal
Based on the details currently available, there are three
fundamental flaws in the 1997 balanced budget agreement.
(1) The tax cut package returns just
one penny on the dollar to American families.
A credible balanced budget plan should share the benefits of a
smaller, less expensive government with America's taxpayers. The
current budget deal fails this test by proposing a small "net" tax
cut of $85 billion (a $135 billion "gross" tax cut minus $50
billion in new tax "offsets" or increases). This modest amount-just
1 percent of the $8.5 trillion1 in estimated tax
revenues over the next five years-is supposed to fund tax relief
for families with children, capital gains tax relief, death tax
reform, and tax cuts for college tuition. However, this amount is
only one-third of what is needed to fund all of these tax cuts
fully; indeed, the full "cost" of the $500-per-child tax credit
alone is $105 billion over five years.
As small as this tax cut is, its actual size may be even smaller
than is being publicized. One of the key elements of this deal is
the assumption that the Bureau of Labor Statistics will adjust the
measurement of the consumer price index (CPI) downward by 0.25
percentage points. This adjustment will generate roughly $6 billion
more in taxes over the next five years because tax brackets,
personal exemptions, and the standard deduction are all indexed to
Thus, the $85 billion "net" size of the tax package falls to
just $79 billion after considering the CPI correction-amounting to
a tax cut of less than one penny for every dollar taxpayers will
send to Washington over the next five years. It means that
taxpayers will receive only 67 cents in tax relief for every new
dollar of spending allocated for government programs.
It would seem that President Clinton and congressional leaders
should be able to do more for taxpayers. The Congressional Budget
Office (CBO) told Congress last week that future tax collections
would be $225 billion more over five years than it had projected.
This $225 billion windfall-$2,250 for every household in
America-should be returned to Americans in tax relief. Instead, it
appears that negotiators used these projected "new" tax revenues
the old-fashioned Washington way: They spent them.
Any credible tax cut package should return more than just a
penny on the dollar to American families. Any credible plan also
should provide more in tax cuts than it does in new spending
Such a tax package should include the following elements:
- Every working family in the United States should receive a tax
credit of $500 per child. This tax cut should not be phased in over
the next five years; families should reap the benefits of the 1997
budget agreement immediately. Moreover, the $500-per-child credit
should be available to all working families regardless of income,
because all families are overtaxed, and any family with a dependent
child under age 18.
- The capital gains tax rate should be cut by 50 percent at a
minimum. Ideally, it also should be indexed to the inflation
- The death tax (estate and gift tax) should be repealed.
- The package should include both an "IRA-Plus" plan and a $2,200
spousal individual retirement account (IRA).
- The package also should include a new tax-free savings plan for
higher education. Under such a plan, families would be able to put
after-tax dollars into an IRA-like education savings account or a
pre-paid tuition plan and withdraw those savings, while the
build-up on the account would be tax-free.
The total value of these five tax cuts is about $230 billion
over the next five years.
(2) The budget deal finances tax cuts
with new taxes and dubious revenue assumptions instead of spending
cuts or asset sale revenues.
A good budget deal should finance tax cuts by reducing federal
spending, not by increasing taxes on other Americans. A sound
budget agreement should lead to a smaller government and a smaller
tax burden, not a redistribution of wealth within the economy.
The budget deal fails this test by proposing to raise some $50
billion in new taxes to offset a portion of the tax cut package.
The bulk of these new revenues-some $34 billion-is to be generated
by extending the Airport and Airway Trust Fund tax, which expires
at the end of this fiscal year. The remaining new tax revenues will
likely come from eliminating various tax deductions for businesses
and, perhaps, reinstating the Superfund environmental tax, raising
another $6.4 billion over five years. By any measure, regardless of
their motivation, these measures are tax hikes that will allow
lawmakers to avoid cutting a comparable amount of wasteful
If the White House and Congress cannot negotiate more spending
cuts to finance the tax cuts, then they should look to raise an
equivalent amount of revenue by selling government assets. Asset
sales lawmakers should consider for quick liquidation include:
- Selling portions of the government's $165 billion direct loan
portfolio, which could raise over $50 billion;
- Selling the government-owned utilities operated by the Power
Marketing Administrations, which could raise another $10.8 billion;
- Selling oil from the Strategic Petroleum Reserve, which could
raise another $11.7 billion.
A sound budget deal should ensure that tax cuts are paid for by
smaller government, not by other taxpayers.
(3) The budget deal opens the
floodgates to new government spending.
A credible balanced budget plan should reduce the size and scope
of government and result in fundamental changes in federal
programs. Both Congress and the White House are claiming that the
budget deal will deliver $115 billion in Medicare savings, $8
billion in Medicaid savings, $61 billion in non-defense
discretionary savings, and $78 billion in defense savings. In
reality, however, lawmakers have used the 1997 budget deal to open
the floodgates to as much as $118 billion in new spending, at least
$96 billion of which is higher discretionary spending.
All of the so-called spending cuts in the plan are reductions
from a "baseline" projection of government spending in which
programs are assumed to grow according to such factors as the rate
of inflation, population growth, and formulas written into law. If
the budget deal's proposals are measured against how much actually
was spent in FY 1997, non-defense discretionary spending will grow
by a cumulative $73 billion over the next five years, and defense
spending will receive about $23 billion in new funding over the
same time period.
Although year-by-year figures are not available, estimates based
on the available data indicate that discretionary spending will be
$7 billion to $8 billion higher in FY 1998 than in FY 1997. As much
as $6 billion of this increase is likely to occur in domestic
programs. Moreover, FY 1998 discretionary spending is likely to be
$11 billion greater than the legal "cap" prescribed by the 1993
As part of these discretionary increases, the Republican
leadership agreed to at least $30 billion in new funding for
President Clinton's education priorities but extracted no
concessions to eliminate wasteful programs in return. At a minimum,
congressional negotiators should have pressed for the elimination
of such unnecessary programs as the National Endowments for the
Arts and Humanities, the Legal Services Corporation, the AmeriCorps
program, and the Corporation for Public Broadcasting. Eliminating
these programs alone would have freed up $5.5 billion for the
President's education priorities or $5.5 billion more for tax
Congressional leaders should have demanded that dozens of other
redundant, outmoded, or useless programs be eliminated in order to
redirect the savings to the President's new initiatives. For
example, the following proposals would save an additional $26
billion to pay for the President's priorities without increasing
- $13.75 billion could be saved over five years by consolidating
and block granting most of the more than 160 job training programs
(which cost more than $20 billion per year) and cutting their
overall funding by 50 percent;
- $8.3 billion could be saved over five years by eliminating the
Department of Energy's Energy Supply Research and Development
programs, which largely benefit wealthy businesses and
- $2.3 billion could be saved over five years by eliminating the
Technology Administration, which has become a "corporate welfare"
program for large firms; and
- $1.8 billion could be saved over five years by eliminating the
Economic Development Administration, the Appalachian Regional
Commission, and the Tennessee Valley Authority's non-power
functions-just 3 of at least 62 federally funded economic
If Congress and the President feel strongly enough about these
new spending initiatives, they should be willing to fund them by
eliminating programs that have become outmoded, redundant, or
In addition, based on the best available information, the budget
deal erases all of the savings lawmakers achieved last year in the
landmark welfare reform bill. At least $22 billion in new spending
will be pumped into welfare programs such as aid for legal aliens,
increased food stamp payments, and health care for children.
Moreover, $37 billion in new discretionary spending is to be
dedicated to bailing out landlords and developers participating in
the Section 8 low-income housing program. Not only is this bailout
bad policy, but it amounts to $37 billion in corporate welfare
disguised as aid to the poor.
As a consequence of this new spending, negotiators were left
with two choices: Extract deeper savings from entitlement programs
such as Medicare or skimp on the size of the tax cuts.
Even if lawmakers renegotiated the deal to increase the value of
the tax cuts and reduce the amount of spending increases, however,
other serious problems remain. For instance, White House and
congressional negotiators have yet to indicate whether spending
next year (FY 1998) will be substantively different from this year,
or whether the hard work of cutting spending and delivering tax
cuts has been put off for later years. If the spending cuts and
full value of the tax cuts are put off until later years, taxpayers
have no choice but to conclude that this deal, like earlier ones,
is not in their best interest.
The experience of the last six budget deals (1982, 1984, 1987,
1989, 1990, and 1993) clearly indicates that future year promises
never materialize. That is why tough enforcement mechanisms are
needed to ensure that lawmakers honor whatever fiscal discipline is
agreed to in the deal, and that its promises are met.
(1) The budget deal must show results
in FY 1998 and not "back-load" deficit reduction.
A sound balanced budget plan must show immediate results in the
next fiscal year (FY 1998) and not delay the hard work until after
2000 (known as "back-loading"). For example, the CBO found that
Clinton's FY 1998 budget pushed 98.5 percent of its deficit
reduction measures into fiscal years 2001 and 2002-after the
President leaves office.
While there are many details yet to be released regarding the
current budget deal, two factors will determine its
- Are the tax cuts phased in over many years?
- Does the new spending begin immediately?
If the answer to both of these questions is yes, then taxpayers
are getting a raw deal. Once again, it will prove that lawmakers
place a higher priority on their new spending than they do on
delivering tax cuts for ordinary Americans.
A serious balanced budget plan should begin cutting both taxes
and spending, without delay, in FY 1998.
(2) Congressional committees must be
given flexibility in meeting the plan's savings targets.
The budget deal should not tie the hands of congressional
committees, such as the House Ways and Means Committee and the
Senate Finance Committee, with respect to how they achieve the
plan's savings goals. This is especially true when it comes to
Medicare reform. There are two very different ways to achieve $115
billion in savings from Medicare. One way is to repeat the mistakes
of past budget deals by enacting price controls on hospitals and
reducing payments to doctors. Not only will this method fail, but
it also will ensure a lower standard of care for seniors because
doctors will have even less incentive to accept new Medicare
The second way to achieve $115 billion in Medicare savings is to
alter the fundamental nature of Medicare by changing it from a
defined benefit program to a defined contributions program. This
change would deliver the following benefits, both to seniors and to
- Seniors would be able to choose from a wide range of competing
- Seniors' access to quality care would be increased, not
- Such a system would rely on consumer choice and competition-not
price controls and reduced payments-to bring Medicare costs into
line. The Federal Employees Health Benefits Program (FEHBP), which
operates on similar principles, has seen its costs moderate and
premiums hold steady in recent years.
- The result of such a fundamental change in the system would be
lower costs, greater choice, and better care for seniors.
It appears that negotiators may be able to dictate many of the
terms for these key committees. Indeed, the deal assumes that the
Home Health Care portion of Medicare will be transferred from Part
A, the near-bankrupt Health Insurance (HI) Trust Fund, to Part B,
the part in which some 75 percent of the costs are paid from
general tax receipts. This gimmick merely shifts funding within
Medicare accounts without fundamentally restructuring the nature of
(3) Because the plan is built on shaky
assumptions, it must be enforced with tough measures such as
overall spending caps.
A credible five-year plan to balance the budget must be enforced
by more than a handshake and back-room agreement between
congressional and White House negotiators. This is especially true
since at least 72 percent of the deficit reduction promised by this
deal comes from two debatable economic assumptions-the so called
fiscal dividend and the $225 billion in new tax revenues the CBO
assumes will flow into the Treasury over the next five years-and
from the phony spending cuts claimed because of baseline
Chart 1 shows that lawmakers began the negotiating process with
the CBO's estimate of a $188 billion deficit in FY 2002 (the year
in which the budget is to be balanced). As daunting as this deficit
seems, the CBO lowered this figure by $34 billion because of the
"fiscal dividend" which it estimates will accrue to government-in
the form of higher tax revenues and lower spending-as a result of
enacting a balanced budget plan.2 Thus, the deficit
forecast negotiators began with actually was $154 billion in FY
2002, not the higher $188 billion.
Even this starting point was lowered, however, thanks to the
CBO's eleventh-hour discovery of a $225 billion error: Its
estimates of federal tax revenues, and the resulting interest
savings, would lower future deficits by $45 billion per year
through 2002. Thus, the negotiators' starting point fell again to
an estimated FY 2002 deficit of $109 billion-two-thirds of the
level the CBO had forecast originally for that year.
Yet another 30 percent of the projected FY 2002 deficit melts
away because of the so-called discretionary spending "cuts" which
actually lead to higher spending. In 2002 alone, these
discretionary spending "cuts" are likely to total about $56
billion. They also lower the projected 2002 deficit to just $53
billion even before a single dollar is "saved" from entitlement
programs such as Medicare and Medicaid.
Because any economic downturn could render these assumptions
meaningless, tough enforcement mechanisms are the only way to
ensure that today's promises become tomorrow's reality. Previous
budget deals have achieved only modest success in controlling
spending through such mechanisms as the sequester (automatic
spending cuts required by the Gramm-Rudman-Hollings Act) and
discretionary spending caps (first instituted in the 1990 budget
agreement and extended in 1993).
The discretionary spending caps will expire after FY 1998.
Lawmakers may be tempted to extend them through 2002, except at the
higher spending levels assumed in the deal. If lawmakers cap
discretionary spending at these higher levels, such a rule will
make a mockery of the concept of spending caps. It would amount to
placing a 95 miles-per-hour speed limit in a school zone.
There are two sensible ways to enforce this balanced budget
deal. One is the legislation sponsored by Representative George
Gekas (R-PA) and Senator John McCain (R-AZ). This legislation would
ensure that the government will not shut down in the event of a
stalemate between the White House and Congress over appropriations
bills. If such a stalemate occurs, the legislation would require
that spending for programs continue automatically into the next
fiscal year, but at 98 percent of the previous year's funding. The
Gekas-McCain proposal would force fiscal discipline on lawmakers
while avoiding the calamity of a government shutdown.
Second, Congress should fix into law the overall federal
spending levels prescribed for fiscal years 1998 through 2002 in
the budget resolution. There are many benefits to enacting
enforceable caps over total federal spending:
- An overall spending cap would control the root cause of
deficits-overspending. In effect, a cap on total federal spending
would put Washington on a fixed budget for the next five
- A cap would control all federal spending, not just the
one-third of the budget that currently is enforced under the
discretionary spending caps.
- An overall spending cap would force lawmakers to review
annually the growth of major entitlement programs to prevent their
growth from crowding out discretionary programs. As a consequence,
lawmakers would have to monitor the effectiveness of the
entitlement reforms enacted in the 1998 balanced budget deal.
- An overall spending cap would prevent new tax revenues-such as
the $225 billion windfall discovered by the CBO-from being turned
into new spending, and ensure that such windfalls immediately
reduced the deficit.
A credible plan to balance the federal budget must result in a
smaller government that costs less and leaves much more money in
the pockets of working Americans. The current budget deal not only
fails these important tests, but in many cases would implement
policies that are worse than taking no action at all.
The plan increases, not decreases, federal spending by at least
$118 billion, with $96 billion of this in the form of new
discretionary spending. The plan also fails to give Americans
sufficient tax relief. Indeed, its net tax cut of $79 billion
amounts to returning to taxpayers less than one penny of every
dollar they will send Washington over the next five years. Worse,
the deal affords taxpayers only 67 cents of every dollar of new
spending given to government programs.
As if these flaws were not enough, there remain the serious
questions of whether the deal will have any impact on FY 1998
spending and how much work it has put off on the next President and
Congress. Given the deal's questionable economic assumptions,
lawmakers should be under even greater pressure to develop
enforcement mechanisms that deliver today's rosy promises.
The 1997 budget agreement is a bad deal for Americans, but
lawmakers still have time to renegotiate it. The real question is:
Will they simply push a bad deal through the process for short-term
political gain, or will they do what is right to balance the
budget, cut the size of government, and allow Americans to keep
more of their own hard-earned money?
1 This estimate does not include the CBO's latest
$225 billion adjustment.
2 The CBO estimates that this fiscal dividend totals
$77 billion over five years, with $34 billion of this in FY