According to the paper prepared by the Office of Management and Budget to present the Clinton Administration’s economic plan (A Vision of Change For America, February 17, 1993), the administration expects that the net effect of the tax and spending actions it is proposing will reduce the federal budget deficit by thirty-eight percent between Fiscal 1993 and Fiscal 1997. The paper’s projections of budget revenues and outlays are reproduced in Lines 1 and 2, respectively, of the statistical table attached to these notes. Line 3 of the attached table gives the Vision paper’s estimates of budget deficits.
There are, of course, many factors and circumstances that will bear on the likelihood of achieving the deficit-reduction result set forth in the Vision paper, but the purpose of this note is solely to evaluate the economic and aggregate outlay assumptions that underlie it. Briefly, my conclusion is that substituting a more realistic assumption regarding the increase of federal spending between F93 and F97 for the one used in the Vision paper suggests that the Clinton plan cannot be expected to achieve anything like the deficit-reduction result it hopes for. Moreover, it is my belief that other considerations bearing on the plan’s likely result, while not dealt with in my note, would confirm than conclusion.
What actually happens to the budget deficit will be governed, of course, by what actually happens to the aggregate of budget revenues and outlays. Thus, our question comes down to this: What are the chances of aggregate budget revenues and outlays behaving over the next four years as pictured in the Vision paper?
Turning first to budget receipts, the Vision paper has these rising, including the net effect on them of the tax changes being proposed under the Clinton plan, from $1143.2 billion in F93 to $1471 billion in F97, at an average rate of 6.5 percent (Line 1 of the attached table).
|1.||Budget receipts, Vision, Table 10||$1143.2||$1250.5||$1322.8||$1407.5||$1471.0|
|2.||Budget outlays, Vision, Table 10||$1475.1||$1513.0||$1564.5||$1612.8||$1677.5|
|3.||Deficits, as in Vision, Table 10||$331.9||$262.5||$241.7||$205.3||$206.5|
|4.||Effect on budget outlays of Clinton spending proposals, Vision, Table 3-1||+7.0||-5.0||-21.0||-40.0||-83.0|
|5.||(2) corrected by (3)||$1468.1||$1518.0||$1585.5||$1652.8||$1760.5|
|6.||Budget outlays that increase at 6.7% a year||$1475.1||$1573.9||$1679.4||$1791.9||$1912.0|
|7.||(6) corrected by (4)||$1482.1||$1568.9||$1658.4||$1751.9||$1829.0|
|8.||Deficits as alternatively calculated: (1)-(6)||$338.9||$268.4||$335.6||$344.4||$358.0|
This seems to me a reasonable estimate. The economic assumption underlying it is surely not an extravagant one for a situation in which nominal GDP, boosted by a cyclical expansion, can be expected to increase at around six percent a year (real growth up 3.5 percent; inflation at 2.5 percent). And while the revenue effect of the tax changes that are proposed under the Clinton plan may vary from what the Vision paper anticipates (Table 3-1 of that paper), the course taken by aggregate revenues will be determined mainly by the economic situation. Accepting what the administration is assuming on that score, my argument accepts its projection of budget receipts.
It is a different story when we turn to the spending side of the budget. Here I believe the administration is seriously underestimating the increase in budget outlays that must be anticipated between F93 and F97. Table 10 of the Vision paper has these rising at slightly under 3.3 percent a year (Line 2 of the attached table), but when they are corrected for the expected effect on them of the plus or minus spending actions proposed under the Clinton plan (Line 4) we find (Line 5) that they implicitly assume an underlying uptrend of budget expenditures of 4.6 percent a year.
But the underlying uptrend is almost certainly faster than that. Looking at the record, one sees that the average annual increase of budget outlays in the four fiscal years preceding F93 was 6.7 percent. Accordingly, it seems to me reasonable to estimate what spending would be under the Clinton plan by letting outlays rise from the F93 base at 6.7 percent a year (Line 6) and then correcting them by the spending adjustments (increases or decreases) that the Clinton plan proposes. This yields an independent estimate of budget outlays (Line 7) that rise at 5.5 percent a year.
We now have what is necessary to calculate what can be expected between F93 and F97 by way of deficit change. Subtracting from the budget outlays calculated on our alternative basis (Line 7), we find (Line 8) that the budget deficit in F97 would not be thirty-eight percent below F93, as contemplated in Vision, but 8.6 percent above it.
There are, of course, many possibilities for error in an analysis of this type. The two principal sources of these are, first, that the economy may behave either better or worse in 1993-97 than as I am expecting and, second, that there could be important negative effects on the economy, and thus on budget revenues, from the Clinton plan’s tax and expenditure proposals. Accordingly, the conclusion reached in my analysis, as in any budget analysis looking four years into the future, must be viewed as tentative and subject to error. But considering all of what may bear on the outcome, some elements of which may darken the outlook for deficit reduction, some of which brighten it, I believe one is warranted in concluding that the program of tax and spending changes proposed in the Clinton economic plan would have no success in reducing the budget deficit; on the contrary, operating under it the budget deficit would more likely rise a bit than fall by a considerable amount.
Mr. Saulnier was Chairman of the Council of Economic Advisors from 1956-1961 and served on the graduate faculty of Columbia University before retiring in 1973.