[Budget of the United States Government]
[III. Creating a Bright Economic Future]
[From the U.S. Government Publishing Office, www.gpo.gov]


 
                 III.  CREATING A BRIGHT ECONOMIC FUTURE

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                 III.  CREATING A BRIGHT ECONOMIC FUTURE

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  There is no doubt that the economic strategy we put in place in 1993 
created the conditions for the extraordinary private sector growth we have 
all witnessed . . . Four straight years of deficit cuts have produced the 
economic expansion as well as real benefits for ordinary Americans: lower 
car payments, lower mortgage rates, lower credit card rates. This balanced 
budget will close a chapter in American history: years--decades in fact--when 
our people doubted whether Government could work for them and questioned 
whether our Nation could set and meet goals.                                                                             
                                      President Clinton                                                        
                                      August 1997                                                             

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   For five years, the President has pursued a fiscal and economic 
policy that has shown remarkable results. Due largely to his 1993 
economic plan, the budget deficit, which had hit a record $290 billion 
in 1992, is not only lower than even the Administration had expected, 
it's also at its lowest level in a quarter-century. The publicly held 
debt not only has stopped rising as a share of the economy, but actually 
has begun to decline. Now, this budget will finish the deficit-cutting 
job and mark a true milestone in American economic history--the first 
balanced budget in 30 years.
   The President's commitment to lower deficits bore fruit right from 
the start. Long-term interest rates fell in 1993 and have remained 
relatively low, helping to spur record levels of business investment. 
Unemployment and inflation have both continued to fall, bringing the so-
called ``misery index'' \1\ to its lowest level in 30 years. The current 
economic expansion, already the third longest in U.S. history, shows no 
signs of ending, putting it on track to become the longest in the 
Nation's history.
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  \1\ Over 20 years ago, economist Arthur Okun developed the concept of 
a ``misery index,'' calculated by adding together the unemployment rate 
and the rate of inflation, as measured by the Consumer Price Index.
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   Continuing its practice of using conservative economic assumptions, 
the Administration projects that growth will continue at a steady pace 
without inflation. Unemployment and interest rates will remain 
relatively low. Due both to a strong economic outlook and to the 1997 
Balanced Budget Act (BBA), the President now proposes a balanced budget 
for 1999, three years earlier than expected. The economic and fiscal 
outlook for the longer term, until 2050, also has improved since last 
year.
  Nevertheless, the coming retirement of the baby boom generation points 
up the need for long-term structural changes that will support the 
financial health of Social Security and Medicare and ensure that future 
generations share in the retirement and health security that senior 
citizens enjoy today.

Budgetary Performance

   By the time President Clinton took office, the deficit for the 
previous year, fiscal 1992, had hit a record $290 billion. For the 12 
years up to then, annual deficits totaled $2.3 trillion. Never before 
had the Nation witnessed such an explosion of public debt. Moreover, 
without changes in policy, public and private forecasters projected that 
the deficit would keep rising, potentially pushing total public debt, 
future interest costs, and deficits into an upward spiral without limit 
(see Chart III-1).
   The Administration set out, first and foremost, to cut this massive 
deficit and to put the budget and economy on a sound,

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sustainable footing. To that end, the President proposed, and Congress 
enacted, the Omnibus Budget Reconciliation Act (OBRA) in 1993 as a solid 
first step toward fiscal responsibility. It has proved to be much more. 
In the last four years, cumulative deficits and accumulating debt have 
fallen more than twice as much as the Administration had conservatively 
projected.
   Still, OMB and the Congressional Budget Office (CBO) agreed that the 
deficit would begin rising again without further action. Consequently, 
the President worked with Congress to finish the job, enacting the BBA 
in mid-1997 with the goal of reaching balance in 2002. The 
Administration now proposes a balanced budget in 1999. In addition, the 
Administration projects that, together, OBRA and the BBA will reduce the 
total deficits from 1993 to 2003 by $4.0 trillion--more than the 
deficits that the Government accumulated from 1981 to 1992.

  The Administration has Exceeded Its 1993 Deficit Reduction Pledge: 
Upon OBRA's enactment, the Administration projected that it would reduce 
the accumulated deficits from 1994 to 1998 by $505 billion. Clearly, it 
will exceed that goal. (In fact, in the five years from 1993 to 1997, 
total deficits are $811 billion lower, as shown in Chart III-2). Each 
year, the deficit has been lower than the Administration had forecast 
before the year began. For 1997, the actual deficit of $22 billion was 
over $150 billion lower than what both OMB and CBO had forecast after 
OBRA was enacted. All told, the Administration now expects that, 
combined with a healthy economy, OBRA will reduce the accumulated 
deficits from 1994 to 1998 by more than twice the projected $505 
billion.
  The Administration has Ended the Debt Buildup of the 1980s: The 
Government finances its deficit by borrowing from the public, thereby 
accumulating its publicly held debt. As a share of Gross Domestic 
Product (GDP),

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Federal debt held by the public \2\ reached a post-World War II peak of 
109 percent in 1946. Because the economy grew faster than the debt for 
the next few decades, the debt gradually fell to about 25 percent of GDP 
in the 1970s. But the exploding deficits of the 1980s sent it back up as 
a share of GDP. In dollar terms, publicly held Federal debt quadrupled, 
rising from $710 billion at the end of 1980 to $3.0 trillion by the end 
of 1992. As a percentage of GDP, it doubled, from about 25 percent to 
about 50 percent--wiping out all the progress achieved since 1956.
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  \2\ This measure excludes debt held in Federal trust funds. At the end 
of 1997, the trust funds held over $1.5 trillion of debt that the 
Federal Government owes to itself. Thus, such debt is both a Government 
asset and a liability.
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   Had this Administration done nothing, the debt would have approached 
$7 trillion, or 70 percent of GDP, by 2002. Instead, working with 
Congress, the Administration reversed the debt build-up as a share of 
GDP, and it now projects that debt will fall below 40 percent of GDP in 
2002 (see Chart III-3).

  U.S. Budgetary Performance Is Among the World's Best: Counting all 
levels of government, the total U.S. budget deficit is smaller as a 
share of GDP than in all other G-7 countries \3\ except Canada (see 
Chart III-4). The reason is not high taxes; the share of GDP devoted to 
taxes is lower in the United States than in any other leading country. 
Rather, the reason is relatively low public spending--even though this 
Nation has a much larger defense establishment than the other G-7 
countries.
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  \3\ The G-7 comprises the world's seven largest industrial powers: the 
United States, the United Kingdom, Germany, France, Japan, Italy, and 
Canada.
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  The Administration has Reduced the Federal Claim on the Economy: By 
1992, Federal spending had reached 22.5 percent of GDP, topping its 
average of 21.2 percent from 1969 to 1997. But, in every budget year 
under this Administration, spending has equaled a smaller share of GDP 
than in any year of the

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previous two Administrations. The Administration now projects that, by 
1999, spending will fall to 20.0 percent of GDP, its lowest level since 
the early 1970s.

   Federal Receipts are Higher than Projected, Mainly Due to Economic 
Growth: In the past five years, spending has been lower, and receipts 
higher, than the Administration had projected, leading to lower deficits 
than projected. With regard to the most recent, and quite extraordinary, 
fall in the deficit from $107 billion in 1996 to just $22 billion in 
1997, the answer lies in a continuing surge in receipts and in spending 
that came in below expectations. That surge is rooted in an especially 
strong economy. Tax rates have remained constant since 1993.
   Some economists predicted that the 1993 targeted tax rate increases 
on the top 1.2 percent of Americans would slow the economy and actually 
lead to lower tax collections, particularly among the well-to-do. In 
fact, tax revenues have soared since 1993--and the largest increases 
have come at the top. Total Federal receipts have risen nearly eight 
percent a year since 1992. Federal income tax revenues rose by nearly 25 
percent from 1992 to 1995 (the last year for which we have data), but by 
nearly 50 percent for those with incomes above $200,000.
   The President's balanced budget for 1999 results from a drop in 
spending of 2.5 percent of GDP since 1992 and an increase in revenues of 
2.3 percent of GDP over the same period, driven by economic growth. 
Thus, 52 percent of the total deficit reduction has come from spending 
cuts, 48 percent from higher receipts.

Economic Performance

   By reducing the Federal Government's demand for capital in the 
financial markets, a falling deficit has freed capital for private 
investment. At the same time, the promise of future budgetary stability 
has promoted business confidence. The fiscal improvement has enabled the 
Federal Reserve to maintain low, stable interest rates that, in turn, 
have helped prolong and strengthen the economic expansion. The surge in 
business investment of the last five years shows that these policies are 
working, and as the budget reaches balance, prospects for continued 
economic progress are excellent.

   The Current Expansion Is the Third Longest: In January 1998, the 
economy recorded its 82nd straight month of growth, marking the third 
longest expansion in U.S. history (and the second longest in our 
peacetime history). If the economy continues to grow through the end of 
1998, the current expansion will become the longest in peacetime 
history, surpassing that of the 1980s. If it continues to grow until 
February 2000, as most private forecasters expect,\4\ the expansion will 
become the longest of all time, surpassing the 106-month expansion of 
the 1960s.
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  \4\ According to the December Blue Chip survey.
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   The Administration's Fiscal Policy Has Promoted a Sound Expansion: 
Unsustainable Federal deficits, in part, stimulated both of the longer 
post-war expansions--the first in the 1960s, the second in the 1980s 
(see Chart III-5). The economy expanded because the Government expanded, 
dragging the private sector along; when the Government removed its 
stimulus, the economy faltered.
   In these earlier expansions, the fiscal stimulus came at different 
times. In the 1960s, the deficit was quite restrained early in the 
decade, but grew sharply after 1965. In the early 1980s, the 
``structural deficit'' \5\ soared to almost five percent of GDP. That 
large deficit helped pull the economy out of the deep recession of 1981-
1982, but the Government's subsequent failure to curb it held up real 
interest rates, led to the financial problems that marked the end of the 
decade, and helped bring on the recession of 1990-1991.
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  \5\ The structural deficit is the deficit that remains after 
accounting for cyclical changes in the economy as well as purely 
temporary factors, such as the annual costs and receipts from resolving 
the thrift crisis.
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   In contrast, during the current expansion, the deficit has been 
shrinking and private investment has propelled the economy forward.

   This Expansion is Led by a Strong Private Sector: Under this 
Administration, the economy has grown at a healthy, inflation-adjusted 
3.0 percent a year. But, at least as important, private demand for goods 
and services has grown even faster than the economy as a whole--3.6 
percent a year compared to

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3.0 percent from 1981 to 1989 and 1.3 percent from 1989 to 1993. The 
Federal Government's direct claim on GDP (mainly, defense and other 
discretionary spending, excluding transfer payments) has shrunk by 2.6 
percent a year. Of the more than 14 million jobs created under this 
Administration, 93 percent have been in the private sector. In the 
1980s, by contrast, the Federal Government's direct claim on GDP grew 
faster than the private sector's claim.
   Why is the contrast important? Because when Federal demands spur 
economic growth, the economy is more vulnerable to sudden changes in 
Federal policy--as in the late 1980s when the Government shifted from a 
defense build-up to a build-down. Though appropriate as the Cold War 
ended, this shift prompted a painful economic adjustment in many 
regions. But, when an expansion is led by the investment decisions of 
thousands of firms and millions of people across the country, the 
economy is less vulnerable to the sudden swings that can arise from a 
single policy decision.

   A Surge in Business Investment Fueled the Expansion: Since 1992, real 
business investment in equipment has expanded at an 11.8 percent average 
yearly rate--more than triple the 3.5 percent annual rate from 1980 
through 1992.
   Investment growth is important for two reasons:
   Investment adds to the economy's productive capacity, and a 
          larger economy generates more income, leading to higher 
          average living standards. In the final analysis, a stronger 
          economy is a prerequisite to meeting the retirement costs of 
          the baby-boom generation without unduly burdening future 
          workers.
   New equipment embodies advanced technology, making workers 
          who use the equipment more productive. Higher productivity 
          permits larger wage increases without threatening higher 
          inflation.

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   The ``Misery Index'' Has Dropped to its Lowest Level in 30 Years: 
Falling unemployment can ``overheat'' the economy, leading to higher 
inflation. In the current expansion, however, both unemployment and 
inflation have continued to fall, even after the expansion entered its 
seventh year. In November of last year, unemployment fell to 4.6 
percent, its lowest level since 1973. Meanwhile, the core inflation rate 
(measured by the Consumer Price Index, or CPI, excluding volatile food 
and energy items), was running at a 2.2 percent annual rate, its lowest 
since 1966. At the end of 1997, the ``misery index''--the sum of 
inflation and unemployment--was at its lowest level in 30 years (see 
Chart III-6).

The Near-Term Economic Outlook, 1998-2008

   The Administration expects the economy to continue to expand at a 
healthy rate without inflation. But, growth should moderate from its 
recent pace. In 1996-1997, real GDP grew at a 3.5 percent average rate, 
much faster than the economy has been able to sustain in recent decades 
without higher inflation. Even allowing for somewhat more moderate 
growth, general macroeconomic conditions would remain very favorable, 
with both unemployment and inflation remaining near their lowest levels 
in decades.
   Though the economy remains strong, one potentially troublesome 
development is the financial dislocation in Asia. To maintain growth in 
the United States and to support stability in Asia, the Administration 
expects to propose a supplemental appropriation to replenish 
International Monetary Fund (IMF) resources and, as it did last year, to 
again propose to provide a contingent credit line to the IMF.
   This budget relies on conservative economic assumptions that are 
close to the consensus among private forecasters, as well as to those of 
CBO. The Administration is confident that, as the budget reaches 
balance, the economy could perform even better. Under this 
Administration, the economy has consistently performed better in 
virtually all respects




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than the Administration or CBO had projected. But, for budget planning, 
the Administration continues to believe it is prudent to use 
conservative economic assumptions, the highlights of which include:
   Real GDP: Real GDP growth averages 2.0 percent on a fourth-quarter-
over-fourth-quarter basis through 2000. For 2001 to 2007, growth 
averages 2.4 percent a year, the Administration's estimate of potential 
sustained real growth. Starting in 2008, projected economic growth slows 
due to the shifting composition of the population. As Americans age, a 
smaller portion of them will likely be in the workforce. The 
Administration expects the resulting slowdown in the growth of hours 
worked to lower real GDP growth.
  Unemployment: The civilian unemployment rate rises gradually, from 4.9 
percent in 1998 to 5.4 percent in 2001, which is the Administration's 
conservative estimate of the threshold level of unemployment consistent 
with stable inflation in the long run.
   Inflation: The CPI rises 2.2 percent in 1998-1999, then 2.3 percent a 
year in the following years. These projections include technical 
improvements in measuring the CPI. The price index for GDP rises 2.0 
percent in 1998, 2.1 percent in 1999, and 2.2 percent in the following 
years. The gap between the two measures of inflation, which has been 
larger in the past, narrows due to recent and expected methodological 
improvements in both indexes. Without these improvements, measured 
inflation would rise slightly more.
  Interest rates: Interest rates, already lower than a year ago, remain 
below levels of recent years as the budget approaches balance. The yield 
on 10-year Treasury notes reaches 5.7 percent by 2001; on a discount 
basis, the 91-day Treasury bill rate drops to 4.7 percent.
   The Administration does not try to project the business cycle beyond 
the next year or so. The expansion will surely end at some point, though 
no signs of a downturn have emerged. But even allowing for future 
recessions, projected economic growth averages 2.4 percent from 2001-
2007, and projected unemployment averages about 5.4 percent. In some 
years, growth will be faster and unemployment lower, while in others, 
growth and employment will fall short of these projections. But, because 
the Administration expects the growth and unemployment assumptions to 
hold on average over this period, they provide a sound, prudent basis 
for projecting the budget. Similarly, the Administration expects 
inflation and interest rates to average near the projections shown in 
Table III-1, although year-to-year fluctuations surely will occur.
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                   Investing in Economic Statistics                                        

  Our democracy and economy demand that public and private leaders have 
unbiased, relevant, accurate, and timely information on which to base 
their decisions. But rapid changes in the economy and society, and funding 
levels that do not enable statistical agencies to keep pace with them, 
increasingly threaten the relevance and accuracy of America's key statistics.
  Economic data, in particular, are not only key indicators for fiscal and 
monetary policy; they also underlie Federal, State, and local income 
projections, investment planning, and business decisions. In recent years,
active public debate has focused on the measuring of GDP, CPI, and many 
other indicators that are widely used, explicitly and implicitly, in public 
and private decision-making. Small but essential investments to address 
these measurement issues will allow our statistical system to track the 
economy more accurately and, in the process, help both Government and the 
private sector better allocate their limited resources.                   
  The budget proposes such carefully targeted investments, ranging from 
improvements in data (including statistics on service industries, construction, 
and State and local government), to the development of more accurate summary 
statistics from those data (such as GDP and the National and Personal Income 
estimates), to greater public access to Government data (including electronic 
distribution). These initiatives are documented in greater detail in Chapter 11 
of Analytical Perspectives, ``Strengthening Federal Statistics.''               

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                                     Table III-1.  ECONOMIC ASSUMPTIONS \1\                                     
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                                                                            Projections                         
                                           Actual --------------------------------------------------------------
                                            1996     1997     1998     1999     2000     2001     2002     2003 
----------------------------------------------------------------------------------------------------------------
Gross Domestic Product (GDP):                                                                                   
  Levels, dollar amounts in billions:                                                                           
    Current dollars.....................    7,636    8,080    8,430    8,772    9,142    9,547    9,993   10,454
    Real, chained (1992) dollars........    6,928    7,187    7,357    7,503    7,652    7,820    8,008    8,199
    Chained price index (1992 = 100),                                                                           
     annual average.....................    110.2    112.5    114.6    116.9    119.5    122.1    124.8    127.5
  Percent change, fourth quarter over                                                                           
   fourth quarter:                                                                                              
    Current dollars.....................      5.6      5.5      4.0      4.1      4.3      4.6      4.6      4.6
    Real, chained (1992) dollars........      3.2      3.6      2.0      2.0      2.0      2.3      2.4      2.4
    Chained price index (1992 = 100)....      2.3      1.9      2.0      2.1      2.2      2.2      2.2      2.2
  Percent change, year over year:                                                                               
    Current dollars.....................      5.1      5.8      4.3      4.1      4.2      4.4      4.7      4.6
    Real, chained (1992) dollars........      2.8      3.7      2.4      2.0      2.0      2.2      2.4      2.4
    Chained price index (1992 = 100)....      2.3      2.0      1.9      2.0      2.2      2.2      2.2      2.2
                                                                                                                
Incomes, billions of current dollars:                                                                           
    Corporate profits before tax........      677      729      754      768      790      805      830      851
    Wages and salaries..................    3,633    3,868    4,057    4,237    4,424    4,623    4,840    5,068
    Other taxable income \2\............    1,693    1,786    1,859    1,915    1,975    2,046    2,128    2,213
                                                                                                                
Consumer Price Index (all urban): \3\                                                                           
    Level (1982-84 = 100), annual                                                                               
     average............................    157.0    160.7    164.1    167.7    171.5    175.5    179.5    183.6
    Percent change, fourth quarter over                                                                         
     fourth quarter.....................      3.2      2.0      2.2      2.2      2.3      2.3      2.3      2.3
    Percent change, year over year......      2.9      2.4      2.1      2.2      2.3      2.3      2.3      2.3
                                                                                                                
Unemployment rate, civilian, percent:                                                                           
    Fourth quarter level................      5.3      4.8      5.0      5.2      5.4      5.4      5.4      5.4
    Annual average......................      5.4      5.0      4.9      5.1      5.3      5.4      5.4      5.4
Federal pay raises, January, percent:                                                                           
    Military \4\........................      2.6      3.0      2.8      3.1      3.0      3.0      3.0      3.0
    Civilian \5\........................      2.4      3.0      2.8      3.1      3.0      3.0      3.0      3.0
                                                                                                                
Interest rates, percent:                                                                                        
    91-day Treasury bills \6\...........      5.0      5.0      5.0      4.9      4.8      4.7      4.7      4.7
    10-year Treasury notes..............      6.4      6.4      5.9      5.8      5.8      5.7      5.7      5.7
                                                                                                                
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\1\ Based on information available as of early December 1997.                                                   
                                                                                                                
\2\ Rent, interest, dividend and proprietor's components of personal income.                                    
                                                                                                                
\3\ Seasonally adjusted CPI for all urban consumers. Two versions of the CPI are now published. The index shown 
  here is that currently used, as required by law, in calculating automatic adjustments to individual income tax
  brackets. Projections reflect scheduled changes in methodology.                                               
                                                                                                                
\4\ Beginning with the 1999 increase, percentages apply to basic pay only; adjustments for housing and          
  subsistence allowances will be determined by the Secretary of Defense.                                        
                                                                                                                
\5\ Overall average increase, including locality pay adjustments.                                               
                                                                                                                
\6\ Average rate (bank discount basis) on new issues within period.                                             

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The Near-Term Budget Outlook, 1998-2003

   The Administration projects that the budget will reach balance in 
1999--ending an era of continuous deficits that lasted 30 years (see 
Chart III-7). By definition, projections are imprecise; the further into 
the future, the more imprecise. But, the Administration is committed to 
close the structural budget deficit and keep the budget in balance--as 
long as the economy maintains normal levels of unemployment.

  The Outlook has Improved Since the Balanced Budget Act: Last summer, 
OMB and CBO both projected that the BBA would not produce a balanced 
budget until 2002. Since then, the budget outlook has improved. Economic 
growth has continued to exceed expectations, and inflation has remained 
low. The resulting changes in the Administration's economic and 
technical projections have reduced the projected deficits and moved the 
expected year of balance ahead to 1999 (see Chart III-8).

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