Harvard professor who served under Bill Clinton: Kevin McCarthy will struggle to balance the budget

Kevin McCarthy reports promises many things for Republican hardliners on their way to winning their jobs as speaker of the US House of Representatives. One of them is a “balanced budget” for 10 years.

As part of that plan, Republicans are demanding significant spending cuts and budget reform in exchange for lifting the debt ceiling this year – puts the US at risk of default.

But a look at the numbers – and history – shows how difficult it will be to balance the budget.

Doing so requires the federal government to generate enough income to cover all of its spending. America managed this feat only twice over the past 60 years – and both times it was related to tax increases, something Republicans don’t like to do. President Lyndon B. Johnson did just that in 1969, and President Bill Clinton made a surplus from fiscal year 1998 to 2001, when he left office.

As one member of the Clinton administration at the Department of Commerce from 1997 to 2001, I was involved in achieving that rare balanced budget and understood the obstacles to delivering repeatable performance. A quick look back at how we did it, along with how much has changed, shows that the Republican Party is unlikely to have managed the same performance.

How does Clinton balance the budget?

When Clinton took office in 1993, the budget deficit in the previous year less than 5% of gross domestic productand the nonpartisan Congressional Budget Office predict a dismal financial outlook.

Clinton’s balanced budget formula is a combination of higher revenue and lower spending, with help from a booming economy. During his second term, he also negotiated a bipartisan budget deal with Republicans.

Afterward campaign committed to reducing the deficitClinton raised taxes on the wealthy in his first year in office. He introduce higher top personal income tax bracket, increased corporate taxes, increased taxes on Social Security benefits, added 4.3 cents per gallon to gas taxes, and eliminated some itemized tax deductions. In terms of spending, Clinton took advantage of “peace dividend” 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 have helped cut the overall deficit to 1.3% of GDP by the end of Clinton’s first term. That is the smallest number in the past 22 years.

The higher taxes led to opposition from Republicans, who won majorities in the House and Senate in 1995. Clinton repeatedly argued with the then Republican Chairman who was the Republican chairman. Newt Gingrich, who force the government to shut down same year.

As part of the budget negotiations, Congress finally passed Balanced Budget Act 1997, keeping Clinton’s original tax increases but cutting capital gains taxes and reducing spending on Medicare and Medicaid. Meanwhile, the economy, fueled by the technology boom, Rapid expansion during Clinton’s second term.

Higher tax rates for the wealthiest Americans, strong economic growth, and continued curbs on government spending create a budget surplus of $69 billion in 1998. The surplus peaked in 2000 at $236 billion before falling to $128 billion in 2001. The surplus – unseen since – allowed the United States to pay off more of its national debt. 450 billion dollars.

Lessons for today

The lesson for Republicans today is that if they’re serious about balancing their budgets, they’re going to have to make some very nasty choices.

In terms of spending, so-called benefits — mandatory programs like Social Security, Medicare and veterans benefits — are now accounts for nearly two-thirds of the federal budgetcompare with less than half when Clinton took office. Funding for these programs is set according to a formula that is difficult to change. And the US population aged 65 and over has increased by 32% since 1993, the demand for benefits is increasing.

Defense spending accounted for 14% more taxpayers’ money, far exceeds every other category in the so-called discretionary budget, which includes everything else from transportation and energy to air traffic control and national parks.

The United States spends 8% of its budget simply paying interest on the national debt. This percentage hasn’t changed much, but the debt itself has grown from $4.5 trillion in 1993 to 31 trillion dollars today mainly due to big tax cuts under the Bush and Trump administrations, costly wars in Iraq and Afghanistan as well as massive public spending to address the 2008 financial crisis and the COVID-19 pandemic.

Now historically low interest rates finishedThe United States will be forced to spend a larger slice of the pie to pay interest.

Nonprofit Policy Committee for Responsible Federal Budget recent estimates that if spending on defense, veterans, Social Security, and Medicare were not taken into account, Congress would need to reduce all other spending by 85% to achieve overall balance. In other words, arithmetic simply means that it is not feasible to achieve anything close to a balanced budget without addressing military spending and entitlement programs.

Reducing military spending has always been controversial — and many Republicans (as well as some Democrats) would oppose such cuts — but especially at a time when the US is ramping up military aid. Ukraine and the Pentagon perceives a threat from China. It stands in stark contrast to the Clinton-era peace dividend.

Cutting mandatory spending will require significant reforms. The US has one of the youngest minimum retirement thresholds in the world, at 62, compared with 65 in Canada and 67 in the UK and Germany. Even France may soon have a higher minimum retirement age of 64 – although the current protests there about increasing it from 62 illustrate the political perils of such a change.

Can they do it again?

There is certainly an opportunity to bridge the gap between income and expenditure.

The Congressional Budget Office has released a The report states 76 options to reduce the deficit. But many of the ideas require tougher choices, such as rolling back some or all of the three most recent tax cuts, raising taxes on the rich, ending or cutting deductions. taxes and apply a consumption-based value-added tax or Tax on burning fuelas well as fundamental reforms to entitlement programs.

Unfortunately, Congress is limited in dealing with such issues.

Back in 1997, after the smoke cleared, both the Clinton administration and Republicans in Congress could claim some political credit for the budget surplus. But – the important thing – both sides recognize that a deal is in the best interest of the country and can align their respective members to get the required number of votes in Congress for ratification. . The contrast to the current political landscape is clear.

Republican Research Committee, a bloc of more than 160 conservative lawmakers, announced the budget plan in June 2022 promises to balance the budget in seven years. The plan proposes trillions of dollars in spending cuts, many of which would fall hardest for low-income Americans. These include shrinking Medicaid, cutting veterans benefits and raising the full Social Security retirement age from 67 to 70. It also calls for higher military spending and further tax cuts – this will require even more cuts to core safety net programs.

It would also lock in Trump’s 2017 tax cuts – the opposite of what the Congressional Budget Office recommended or what Clinton did in the 1990s to ensure a balanced budget.

Without a credible Republican deficit-cutting plan on the table, I believe the odds are in favor of a protracted strike on the debt ceiling, which could topple the precarious US economy fall into recession.

While the National Assembly seems very unlikely To allow for default, this brawl would waste time and energy that should have been spent figuring out how to strengthen programs like Social Security and close tax loopholes that drain away revenue.

Budgeting in itself is not the goal. Most economists agree that governments should reduce public debt in times of prosperity and reduce deficits to support people when the economy is weak.

In the late 1990s, the United States was fortunate to enjoy a thriving economy that helped Congress and the president achieve fiscal surpluses. In my opinion, what the country needs now is not quicker fixes but a sustainable path to stabilizing the national debt. That requires growing revenue and reducing unnecessary spending responsibly.

Linda J. Bilmes is Daniel Patrick Moynihan Senior Lecturer in Public Policy and Public Finance, Harvard Kennedy School.

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