Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Businessweek Archives

Commentary: You Can't Balance Tomorrow's Budget Today

News: Analysis & Commentary: COMMENTARY


With formal passage of its 1996 spending blueprint, Congress is plowing ahead with the most dramatic shift in federal budget policy in 25 years. By the time lawmakers fill in the blanks this fall, they will have gone a long way toward overhauling government and eliminating chronic deficits.

But will these changes really balance the budget in seven years, as the Republicans pledge? Or even 10 years, as President Clinton vows? Don't bet on it. Says former Congressional Budget Office director Robert D. Reischauer: "I'll sell you my youngest child if the number in 2002 is zero."

WHO'S RIGHT? There are many good reasons this year's budget probably won't balance the books: Economic conditions for the next 10 years are unknowable. The savings from radical changes in Medicare and Medicaid are uncertain. Real cuts in many programs won't be made for years. There are no reserves for unexpected disasters. And it will be impossible to estimate what massive tax reform will do to federal receipts. In short, by unconditionally embracing their bumper-sticker pledge to balance the budget by 2002, Republicans run a big risk of disappointing already cynical voters.

The biggest uncertainty: The economy. The CBO projects average growth of just under 2.3% for the next decade, while Clinton's Office of Management & Budget reports about 2.45%. The difference may seem trivial, but the CBO's projection would leave the White House with a $62 billion deficit instead of a small surplus in 2005. Which side is right? "Nobody can say for sure what will happen," concedes CBO Director June E. O'Neill.

In an economy that will reach $12 trillion by 2005, even tiny shifts in the pattern of growth can wreck the best fiscal plan. If the economy slumps later this year, then snaps back to the projected growth trend, the 2002 deficit still would exceed $50 billion. On the other hand, if planned GOP tax cuts boost the economy as promised, new revenues could speed deficit reduction.

That's just part of the problem. Both Clinton and the GOP are mulling over Medicare reforms that would ease seniors into health-maintenance organizations. But no one really knows how much this approach can save. OMB figures that Medicare costs will rise 8.2% annually over the next decade, while the CBO puts the rise at 10.3%. That's a spread of $52 billion in 2005 alone. "They are guessing," says Marilyn Moon of the Urban Institute.

Whatever the actual savings in Medicare and Medicaid, at least the changes Congress makes in 1995 will affect those programs for years to come. For other spending--from environmental protection to trade subsidies--Congress has to cut one year at a time. The GOP vows to slash these programs by $190 billion through 2002. But this year's slice will be only about $10 billion. Already, pressure is building to protect pork-laden projects.

Other potential problems: GOP plans for major tax reform could scramble federal revenues. If the 1986 Tax Reform Act is any indication, big changes in the tax code will produce massive, unanticipated shifts in federal receipts. By 1991, for example, receipts were $100 billion less than the reformers had figured. Similarly, unforeseen catastrophes--floods, oil shocks, or wars--can force hefty new spending. It's hard to imagine going through a decade without something major going wrong, but neither Clinton nor Congress has budgeted for the inevitable.

The GOP's failure to balance the budget shouldn't diminish the significance of the coming cuts, which will approach $1 trillion. After all, a zero balance is an artificial target that means little to Main Street or to economists. It's real progress just to get the deficit below 1% of gross domestic product by 2002. The problem, rather, is one of expectations: By promising balance, the GOP may have raised voter hopes it can never satisfy.


Likely obstacles to a balanced budget

THE ECONOMY Does anybody really know what the economy is going to look like in 10 years? Or in 10 months? A slowdown would curb tax revenues and force spending up.

MEDICARE Congress wants to thin the bloated monster by easing the elderly into health maintenance organizations. How many will go? How much will it save? No one has a clue.

DOMESTIC SPENDING Congress would cut nondefense appropriations by nearly $200 billion over seven years, but it will make only $10 billion in real cuts this year. The rest? Um, later.

STUFF HAPPENS Wars, earthquakes, floods, oil embargoes. They all cost the government lots of money. Similarly, tax reform could produce massive shifts in Federal receipts. There is no contingency for either.By Howard Gleckman

blog comments powered by Disqus