One of the most striking things about Clinton's new budget proposal, besides the welcome reappearance of a surplus, is the modest nature of its economic assumptions. Despite the 3.6% annual growth rate of the last two years, the Administration assumes the economy will enjoy only a 2.2% growth rate for the next six years. That's a low estimate, even if there is a downturn: From the end of 1979 to the end of 1985, a period which included two recessions, growth averaged 2.5%.
Such a conservative approach to economic forecasting has been one of the hallmarks of the Clinton Administration. Indeed, it was crucial to achieving a balanced budget, since conservative revenue projections kept a lid on spending. And with the economy consistently stronger than expected, the past few years have seen positive budget surprises.
Now, that prudent approach needs to be applied to the revenue and spending parts of the budget as well. Clinton's budget calls for adding 30 new tax breaks to the tax code. In the short run, they won't be very expensive, but tax breaks which appear tightly focused at first have a way of mushrooming in cost over time. And Clinton's budget projects $219 billion in cumulative surpluses from 1999 to 2003. Unfortunately, that assumes almost no growth in domestic discretionary spending over the same period, an unlikely prospect.
Finally, the Administration and Congress must take serious steps toward fixing Social Security, which could run large deficits when baby boomers start retiring. Clinton's proposal to reserve potential surpluses for dealing with Social Security is a start, and may even be enough if the current productivity growth rate of 1.8% continues. But it would be only prudent to anticipate a less happy outcome and plan reforms accordingly.