South-Western College Publishing - Economics  

The Demise of the Deficit
Subject Federal Budget Deficit
Topic(s) Fiscal Policy; National Debt; Federal Deficit; Government Expenditures
Key Words Fiscal Policy, National Debt, Budget Surplus, Federal Deficit, Government Expeditures, Social Security, Entitlement Programs
News Story

For the first time in 30 years a President has submitted a balanced budget to Congress. After decades of budget deficits, Clinton's $1.7 trillion budget is projecting a $9.5 billion surplus next year. The Clinton budget achieves balance three years ahead of the 2002 target. Overall, Clinton's budget projects a 3.9% increase in federal spending. The increased spending would be offset by increased revenues, largely from the proposed $65.5 billion tobacco settlement and from $23 billion in increased taxes from the insurance industry and Wall Street.

Clinton proposed #130-$150 billion of new spending on child care, education, Medicare, transportation, research, and the environment over the next five years. His plan also calls for a 3.1% increase in pay for Federal employees and the armed forces.

More than half of the budget is earmarked for Social Security, Medicare, Medicaid, and other entitlement programs. Spending for these programs will increase by 6% this year. Other domestic programs and agencies will receive a 5% increase. Defense and foreign aid spending will remain virtually unchanged. The Department of Agriculture was the only cabinet-level agency whose budget was decreased.

Tax cuts, amounting to $24.2 billion through the year 2003, were also a part of the new budget. The principal beneficiaries would be low- and middle-income families with tax breaks coming for child-care costs and energy efficiency.

There are already plans for the projected surpluses that may total $1 trillion by 2008. Mr. Clinton wants to stockpile these surpluses until Congress and the administration can come up with a plan to revamp Social Security. It is thought that unless Social Security is modified by 2029, it will only be able to take care of 75% of projected retirees. (Updated May 19, 1998)

  1. What are the consequences for federal governement revenues and expenditures of having a high employment economy?
  2. Inflation was very low in 1997 and is forecast to remain low for the next few years. What are the impacts of low inflation on the federal deficit?
  3. A portion of the increased expenditures in the President's budget will be used for promoting research. What impact will increased spending on research have on the federal budget next year? In the future?
Source Eric Pianin, "First Balanced Budget in 30 Years Offered by Clinton," Washington Post, February 3, 1998.

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