    [Budget of the United States Government]
    [III. Sustaining Our Economic Prosperity]
    [From the U.S. Government Publishing Office, www.gpo.gov]

    [[Page   19]]

                    III.  SUSTAINING OUR ECONOMIC PROSPERITY

    [[Page 21]]

                    III.  SUSTAINING OUR ECONOMIC PROSPERITY

      ----------------------------------------------------------------------

      In 1993, Vice President Gore and I took office determined to change our course, to follow a new economic
    strategy founded on fiscal discipline, investment in our people, and expanded trade. Today the success of that
    strategy is very much in evidence . . . America has come a long way in the last seven years--from recession to
    recovery; from economic disorder to a fiscal house finally in order. We have even begun to pay down our debt. By
    putting first things first, by saving Social Security and strengthening Medicare, our Nation can actually become
    debt free for the first time since 1835, when Andrew Jackson was President.

                                          President Clinton
                                          August 1999

      ----------------------------------------------------------------------
      When President Clinton took office in 1993, his greatest priority was
    to get the economy moving again and, in turn, restore prosperity and
    purpose to our Nation. To reach this goal, it was essential to reverse
    the unrestrained growth of the Federal budget deficit. In the previous
    12 years, the budget deficit had exploded, sapping resources from
    productive investment and undermining confidence in the Government's
    ability to help shape our economic future for the better.
      The President confronted a Federal budget deficit that had grown
    enormously since 1981--at $290 billion dollars in 1992, the deficit was
    the largest in the Nation's history. During the same period, the string
    of annual budget deficits added to the national debt held by the
    public.\1\ The debt grew by $2.3 trillion in 12 years to reach a total
    of $3 trillion dollars in 1992. The publicly held debt was so large that
    it required, on an annual basis, almost 15 cents of every Federal dollar
    to provide for the interest costs to finance it. The Government's
    massive borrowing also imposed costs on the private sector; higher
    interest rates made it more expensive for Americans to finance home
    mortgages and other borrowing, and for American businesses to finance
    investments upon which the Nation's job creation and economic expansion
    depend.
    ---------------------------------------------------------------------------
      \1\ National debt held by the public (or publicly held debt) means
    funds that the Government has borrowed from--and owes to--the public.
    ---------------------------------------------------------------------------
      Seven years later, the economy is strong, the budget is balanced, the
    publicly held debt is declining and can be eliminated in 2013. There are
    many measures of the economy's success: during this Administration, the
    economy has grown at an average inflation-adjusted rate of 3.8 percent;
    there are more than 20 million new jobs; and, the unemployment rate is
    at its lowest point in 30 years. The Administration's fiscal policy
    produced a profound reversal of course from the largest Federal budget
    deficit in history to the largest surplus in history, resulting in a
    total of $1.8 trillion in deficit reduction in the course of seven
    years. We have begun to reduce the publicly held debt, paying down $140
    billion of debt and saving $8 billion in annual debt service costs. This
    turnaround in the national debt can continue. If we keep the course of a
    sound fiscal policy, we will eliminate publicly held debt by 2013,
    making the United States a debt-free Nation for the first time since
    1835.

    The Path to Prosperity

      Immediately after taking office, the President moved to set the
    Nation's economic path right by introducing his three-part economic
    plan. This strategy was based upon: fiscal discipline, making Government
    more efficient, controlling the growth in spending,

    [[Page 22]]

    and taking measures to cut significantly the Federal budget deficit;
    targeted investments, including education and research and development;
    and, engagement in the international economy, including expansion of
    global trade, and opening markets for American exports.
       Several months later, after tireless efforts by the President, his
    Administration, and Democrats in Congress, Congress passed the Omnibus
    Budget Reconciliation Act (OBRA) of 1993 with its deficit reduction plan
    to cut the deficit in half as a percentage of the economy in five years.
    To finish the job of eliminating the deficit, the President and Congress
    joined in a bipartisan effort to pass the 1997 Balanced Budget Act
    (BBA), which reached its goal four years ahead of schedule, producing
    the first budget surplus in a generation in 1998. In six years, after
    inheriting the largest deficit in history, a $290 billion deficit, the
    President and his successful strategy produced the largest surplus in
    history, a $69 billion surplus, and proceeded to build on that
    accomplishment with another historic surplus, $124 billion, in the
    seventh year of the Administration.
      The turnaround in the budget under President Clinton is the largest
    deficit reduction in dollar terms in our history; and relative to the
    economy, the improvement is the greatest since the years immediately
    following the massive deficits of World War II. Last year, 1999, marked
    the second year in a row that the budget was in surplus--the first back-
    to-back surpluses since the post-war economic boom of the mid-1950's.
       The surplus has allowed the Government to turn the corner and to
    retire some of the publicly held debt, reducing the accumulated
    obligations from past deficits and bringing down the Government's
    ongoing interest costs. Because we have paid down the debt by $140
    billion, while the economy has grown, debt service costs have declined
    almost to 12 cents on every Federal dollar, which produced a savings of
    $8 billion due to lower interest payments. By adhering to the path of
    fiscal discipline, the publicly held debt can be eliminated by 2013,
    which in turn will eliminate massive interest payments to finance the
    debt. In 1999, such interest payments amount to $230 billion.
      These results are all the more remarkable when compared with the
    projected results if this Administration had not tackled the difficult
    problem of deficit reduction. If the Clinton Administration had not
    changed the inherited policy, with the same trajectory of growth, in
    2001, the publicly held debt would exceed $6 trillion, or 67 percent of
    Gross Domestic Product (GDP), draining 17 cents from each Federal dollar
    to cover interest costs. Instead, the publicly held debt is now
    projected to be $3.3 trillion, or 33 percent of GDP, and declining.
    Under the President's long-term plan to meet the demographic changes of
    the Nation by strengthening Social Security and Medicare, to which debt
    reduction is central, debt held by the public can be reduced to zero by
    2013.
      The President's fiscal policy soon yielded changes in the economy that
    are so broad and enduring that February 2000 marks the achievement of
    the longest economic expansion in this Nation's history. At the very
    start of the President's deficit reduction strategy, financial markets
    responded to the prospect of meaningful deficit reduction by
    substantially reducing long-term real interest rates (that is, actual
    market rates minus expected inflation). These lower real interest rates
    reduced the cost of borrowing, prompting more business investment, which
    resulted in faster economic growth, increased job creation, rising
    productivity, and higher real wages.
      The numbers confirm this story of economic success. Long-term real
    interest rates under President Clinton have been lower than those of the
    previous 12 years by an average of 1\1/4\ percentage point. The rate of
    real economic growth in this Administration has averaged 3.9 percent per
    year--compared with an average growth rate of 2.8 percent per year in
    the previous 12 years. In the past seven years, more than 20 million new
    jobs were created. At 4.1 percent in December, 1999, the unemployment
    rate is at its lowest rate in three decades and has fallen by more than
    three percentage points since 1992. Productivity has risen by 2.7
    percent annually in the last four years. As a result, after two decades
    of stagnant wages, real wages have grown during this Administration, for
    a total of 6.5 percent growth. The number

    [[Page 23]]

    of people in poverty has dropped by 4.8 million, and 7.2 million
    Americans have left the welfare rolls.
      The economy continues to thrive, in part because price inflation has
    dropped. While the economy has continued its expansion, strong
    productivity growth, reflecting the payoffs of public and private
    investments in people and business, has helped keep inflationary
    pressures in check while supporting solid real wage gains. The
    underlying core rate of inflation was 1.9 percent in 1999, the lowest
    rate in more than 30 years. Slower inflation is not characteristic of
    previous economic booms and has contributed to the longevity of this
    expansion. The decline in the inflation rate and falling unemployment
    have produced the lowest ``misery index'' since the 1960s. (The index
    combines the unemployment and inflation rates.)
      ----------------------------------------------------------------------

                            Economic Growth and Fiscal Discipline Benefit the American People

       President Clinton's economic program has concentrated on changes that benefit the American people in their
    daily lives and their prospects for the future. The success of this strategy is clear:

                                      The economy has created more than 20 million jobs since January 1993,
                                      nearly all of them in the private sector, most of them full-time, and in
                                      sectors that pay good wages.

                                      The unemployment rate is the lowest it has been in 30 years; for
                                      African Americans and Hispanics, unemployment is lower than at any time in the
                                      quarter-century for which separate statistics have been kept.

                                      Work has begun to pay more, reversing a two-decade trend of declining
                                      real wages--hourly wages have grown a cumulative 6.5 percent, boosting
                                      household incomes throughout the economy.

                                      Median family income, adjusted for inflation, has increased by $5,046
                                      in 1998 dollars, rising from $41,691 in 1993 to $46,737 in 1998.

                                      After two decades of income decline and stagnation, Americans at the
                                      lower end of the income scale--those in the poorest 20 percent of households--
                                      have seen a rise in their real incomes. Since 1993, their incomes have risen
                                      by almost $900 per household (in 1998 dollars), a 10-percent increase.

                                      In the past seven years, 7.2 million people have left the welfare
                                      rolls, a 51-percent decline. Welfare recipients now account for the lowest
                                      percentage of the U.S. population since 1967. Meanwhile, 1.5 million people
                                      who were on welfare in 1997 are now working, and all States have met the work
                                      requirements imposed by the 1996 welfare reform law.

                                      From 1993 to 1998, the number of poor people in America declined by
                                      4.8 million, and there are 2.1 million fewer poor children. The poverty rate
                                      has declined sharply from 15.1 percent to 12.7 percent, the lowest it has been
                                      since 1979.

                                      Crime rates are at the lowest level in over 25 years.

                                      A record number of Americans now own their own homes, which was made
                                      possible by lower real interest rates and larger real incomes. More than eight
                                      million additional households are homeowners since the President took office.

      ----------------------------------------------------------------------

    Budgetary Performance

      Deficit Reduction has Far Exceeded Projections: In the 12 years of
    spiraling budget deficits before President Clinton took office, the
    national debt held by the public quadrupled, growing by $2.3 trillion.
       In dollar terms, this was the largest buildup of Federal debt in the
    Nation's history. The President's program, enacted by Congress in 1993,
    OBRA, was a crucial step toward fiscal responsibility. The
    Administration expected OBRA to reduce the deficit significantly; but
    the actual improvement in the budget has been more than twice what was
    originally projected.

    [[Page 24]]

      To finish the job of eliminating the budget deficit, the President
    worked with the Congress to enact the bipartisan BBA in mid-1997, which
    set a goal of reaching a balanced budget by 2002. Because of fiscal
    discipline and unexpectedly good economic performance, the budget went
    into surplus in 1998, four years sooner than projected. Upon OBRA's
    enactment, the Administration had projected that it would reduce the
    accumulated deficits from 1994 to 1998 by $505 billion. In fact, the
    back-to-back surpluses in 1998 and 1999, combined with reduced deficits
    from 1993 through 1997, were responsible for $1.8 trillion of deficit
    reduction (see Chart III-1). The total deficit reduction from 1993 to
    2005 will be approximately $6.7 trillion.

      The Clinton Economic Policy has Reversed the Debt Buildup of the
    1980s:  When the Government runs a deficit, it must borrow from the
    public to finance the excess outlays, in turn accumulating what is known
    as publicly held debt. For much of our Nation's history, the
    accumulation of debt was traditionally associated with the need to
    provide for wartime expenses. For example, compared with the size of the
    economy as measured by GDP, publicly held Federal debt accumulated to a
    sum even greater--peaking at 109 percent at the close of World War II in
    1946. For many years after that, the economy grew faster than the debt,
    and the ratio of debt to GDP gradually fell to about 25 percent in the
    1970s. The exploding deficits of the 1980s sent it back up; debt held by
    the public peaked at 50 percent of GDP in 1993. Since then, the
    Administration's policy of deficit reduction has steadily reduced this
    ratio. The back-to-back surpluses of 1998 and 1999 have even cut into
    the dollar amount of publicly held debt, driving down the size of the
    debt relative to the economy still faster. Publicly held debt is
    expected to fall to 21 percent of GDP by 2005, and to be eliminated by
    2013.
      Without a change in policy, both OMB and the Congressional Budget
    Office (CBO)

    [[Page 25]]

    had projected publicly held debt would have approached $7 trillion, or
    75 percent of GDP, by 2002, and would have reached even higher levels
    thereafter. Instead, because of the Clinton economic program, at the end
    of 1999, the ratio of publicly held debt to GDP had already fallen about
    22 percentage points below projections made just before the
    Administration began pursuing its concerted policy of deficit reduction
    (see Chart III-2).

      There is a Surplus by any Measure: Until recently, the unified budget
    has been the most commonly used framework for tallying the Federal
    Government's deficits and surpluses. The unified budget includes all
    Government receipts and spending, including Social Security
    contributions and benefits. This measure is the most appropriate to use
    in evaluating the effect of the Federal Government's operations on the
    economy; obviously, for that purpose, it is essential to leave nothing
    out.
      Because contributions to Social Security have been greater than the
    benefits paid out, the Social Security trust funds have been
    accumulating surpluses. In the unified budget, these Social Security
    surpluses are counted toward the unified surplus. Without the Social
    Security surplus, the unified budget would not have been balanced in
    1998.
      Recently, attention has been focused on the budget surplus or deficit
    excluding Social Security trust fund surpluses--the so called ``on-
    budget'' surplus or deficit (which also excludes the relatively small
    surplus or deficit in the U.S. Postal Service fund). Within this budget
    framework there has also been a large reduction in the deficit over the
    past seven years (see Chart III-3). The on-budget deficit has fallen
    from $340 billion in 1992, to a $1 billion surplus in 1999. In 2000, it
    is expected that the surplus will be larger, at $19 billion. The
    improvement in the unified budget for the past seven

    [[Page 26]]

    years is due primarily to the decline in the on-budget deficit.

       Government Expenditure as a Share of the Economy has been Reduced:
    Federal spending reached a higher share of the economy during the
    previous two Administrations than at any other time since the end of
    World War II; it was still near its peak, at 22.2 percent of GDP, in
    1992. The defense buildup in the early part of the 1980s, higher Federal
    interest payments because of increased debt plus high interest rates,
    and large increases in the cost of Federal health programs overwhelmed
    all efforts to reduce spending. This pattern has been reversed under
    President Clinton, while, at the same time, this Administration has made
    investments in education, the environment, and other priorities. During
    the last five years, the ratio of Federal spending to GDP has steadily
    declined, and in 1999 it was only 18.7 percent, a smaller percentage of
    the economy than at any time in a quarter century.
      Economic Prosperity has Spurred Receipts: A healthy economy and a
    booming stock market have led to a surge of Federal tax receipts. In the
    past seven years, receipts have generally been higher and spending lower
    than projected in the budget, leading to more deficit reduction than
    expected. Most recently, the surprisingly strong growth in receipts has
    been especially important in bringing the budget into surplus well ahead
    of schedule, in turn starting the reduction of the national debt.
      The United States is a World Leader in Budgetary Performance: In the
    1980s, the United States was criticized by world leaders for its large
    budget deficits, which were seen as driving up worldwide interest rates
    and threatening global economic growth. The Clinton Administration's
    fiscal policies have put an end to this criticism. The United States can
    now point proudly to its fiscal policy as a model for other countries.
    The United States is a leader among the G-7 nations; only Can

    [[Page 27]]

    ada runs a larger surplus as a percentage of its GDP, and four of the
    other five nations are in deficit (see Chart III-4). The reason for this
    outstanding U.S. performance is comparatively low public spending. The
    share of GDP devoted to taxes is lower in the United States than in any
    other leading country, even though the United States supports a much
    larger defense establishment than the other G-7 countries and maintains
    a balanced budget.

    Economic Performance

      The Administration's strategy of reducing the Federal budget deficit
    while investing in people and opening foreign markets has helped to
    unleash a powerful surge of private economic activity. Eliminating the
    deficit has freed savings to finance private investment in business and
    housing, and enabled the Federal Reserve to maintain generally lower
    interest rates for the past seven years; in turn, that has helped
    maintain and strengthen the economic expansion. Businesses have been
    able to borrow for capital improvements at favorable interest rates. New
    home buyers have been drawn into the housing market because of the lower
    interest rates, while current homeowners have been able to refinance
    their mortgages. The strong economy has fostered confidence among
    consumers and businesses, reinforcing the effects of the fiscal and
    monetary policy. The surge in business and residential investment since
    the early 1990s shows that the Administration's fiscal policy is
    working; and with the budget now balanced and producing a surplus,
    prospects for continued economic progress are excellent.

      The Expansion Sets a New Record: This February, the economic expansion
    enters its 107th month, setting a new record as the longest expansion in
    U.S. history (statistics go back to the middle of the 19th Century).
    Earlier post-World War II expansions have generally been curtailed when
    rising inflation has forced the Federal Reserve to raise interest

    [[Page 28]]

    rates to curb demand. Demand has grown very rapidly in the United
    States, but inflation has generally drifted downward, so monetary policy
    has been able to accommodate the growing economy. Such a moderate
    inflation performance this long into an expansion is unique in post-war
    economic history.
      The Administration's Fiscal Policy has Helped Extend the Expansion:
    Federal budget deficits that were ultimately unsustainable helped
    stimulate the two other lengthy post-World War II economic expansions--
    the one in the 1960s and the other in the 1980s. In those earlier
    instances, an expanding Government dragged the private sector along--but
    those stimulative policies could not continue indefinitely, because they
    caused rising inflation and Federal debt. When the stimulus ended, the
    expansions lost their underpinnings.
      In the expansion of the 1960s, the deficit was restrained at first,
    but it grew sharply after 1965 because of spending for the war in
    Vietnam, which helped bring on the inflation that marked the end of the
    decade, and with it the expansion. In the early 1980s, the ``structural
    budget deficit'' (the deficit that would remain even if the economy were
    at high employment) was pushed to almost five percent of GDP by large
    tax cuts and expanded military spending. \1\ Though the actual deficit
    declined after the deep 1981-1982 recession was over, the ``structural
    deficit'' did not. The Government's failure to curb the structural
    deficit once the 1980s recovery was under way held up interest rates,
    contributing to the financial problems that marked the end of that
    decade and helped to bring on the recession of 1990-1991.
    ---------------------------------------------------------------------------
      \1\ The structural deficit is the budget gap that would remain after
    removing the effects of the business cycle on spending and receipts
    (along with purely temporary factors, such as the annual budgetary
    effects that arose from the crisis in the Savings and Loan industry).
    ---------------------------------------------------------------------------
      In contrast, during the current expansion, the Federal budget deficit
    has been eliminated; and that shift in fiscal policy has facilitated the
    rise in private investment that propelled the economy forward.

      This Expansion has been Led by a Strong Private Sector: Since
    President Clinton took office in 1993, the economy has grown at an
    average rate of 3.9 percent per year after adjustment for inflation,
    compared with an average growth rate of 2.8 percent over the previous 12
    years. Recent growth has been driven by increased demand for private
    goods and services. The Federal Government's direct claim on GDP (mainly
    defense and other discretionary spending, not counting transfer
    payments) has actually shrunk over the past 6\3/4\ years at an average
    real rate of 0.6 percent per year, while the private sector of the
    economy has grown at a 4.2 percent annual rate. Meanwhile, 92 percent of
    the more than 20 million jobs created during this Administration have
    been in the private sector (and Federal Government employment has shrunk
    by 377,000, as described in Chapter 10, ``Restoring Trust in
    Government'').
      Business Investment has Spurred Growth: The ratio of real business
    equipment investment to real GDP has reached record levels: 11.2 percent
    in the fourth quarter of 1999. Since the beginning of 1993, inflation-
    adjusted equipment investment has grown at an annual rate of 12.1
    percent, more than 2\1/2\ times its annual rate of growth from 1980
    through 1992 (see Chart III-5).

      Investment growth is important for two reasons:
       Investment adds to the economy's productive capacity by
              providing more capital goods.
       New equipment added to the capital stock contains the latest
              technology; so the more we invest, the faster we adopt new
              production techniques.
      Both additions to capacity and the adoption of new technology make
    workers more productive, and have helped to restore productivity growth
    to its fastest pace since the 1960s. Increases in productivity are the
    only way to raise real wages and average living standards over the long
    term, because employers cannot pay workers more unless they are
    producing more. Increased productivity also helps curtail inflation by
    allowing business to pay workers more without increasing prices because
    the workers' additional output pays for the higher wages.

    [[Page 30]]

      Productivity Growth has Revived: In the 1970s, productivity growth
    (the average annual growth rate in output per hour in the nonfarm
    business sector) fell sharply, from 2.7 percent per year to 1.5 percent.
    Lower productivity growth meant a slowdown in real wage growth and
    stagnating living standards. With productivity growing at nearly three
    percent per year, living standards double every generation. With
    productivity growing at only 1.5 percent per year, each generation sees
    only a 50 percent improvement in living standards, and many within each
    generation can find themselves falling behind the living standards of
    their parents (see Chart III-6).
      For 20 years following the 1970s slowdown, productivity growth stayed
    at the new slower rate. Since then, however, productivity growth has
    staged a remarkable recovery. On average, in the four years since the
    third quarter of 1995, output per hour in nonfarm business has been
    rising by 2.7 percent per year. This is the same growth rate as before
    the slowdown.
      It is still too soon to know for sure if the earlier trend has
    returned permanently. Some of the extra growth could be due to temporary
    factors that will be discernable only with the passage of time but the
    fact that the higher trend has endured for four years makes it more
    likely to persist. This is welcome news, not only for businesses seeking
    to hold down costs and maintain a competitive pricing structure, but
    also for American workers and their families, who once again see real
    improvements in their standard of living.

      The Lowest Misery Index in 30 Years: Both unemployment and inflation
    have continued to fall even as the expansion finishes its ninth year.
    Last year, unemployment fell to 4.2 percent, the lowest annual average
    since 1969; inflation, at 1.9 percent (as measured by the core CPI,
    excluding volatile food and energy prices), was the lowest since 1965.
    The misery index--the combination of the inflation rate and the
    unemployment rate--is lower than at any time since the 1960s (see Chart
    III-7).

      Unemployment Rates and Interest Rates are Both Low: The combination of
    interest rates and unemployment is at its lowest in decades. Generally,
    since President Clinton took office, interest rates have been below the
    average levels of the 1980s. It is noteworthy that real interest rates
    have remained low despite sustained economic growth and low
    unemployment, which increase the demand for credit and might normally
    send rates higher. Even with the recent increase in interest rates in
    the face of sustained strong economic growth, the combination of
    interest rates, growth, and unemployment remains the best in decades.

    The Economic Outlook

      Conservative Forecasts Call for Continued Growth and Low Inflation:
    Continuing its prudent economic forecasts, the Administration projects
    that growth will moderate somewhat. Last year's unemployment rate was
    the lowest in three decades, and is projected to rise somewhat over the
    next few years; inflation is also projected to increase slightly.
    Special factors including the strong dollar, low oil prices, and the
    economic slowdown abroad have held inflation down over the last several
    years, but they are not expected to be permanent.
      Still, if macroeconomic policies remain sound, the economy could well
    continue to outperform this conservative forecast, as it has for the
    past seven years. The Administration expects that the record-setting
    expansion will continue for the foreseeable future, and will sustain
    many of the economic gains of the last few years. Ultimately, the
    Administration believes the economy can return to its long-run potential
    growth rate of approximately three percent per year \3\ on a sustainable
    basis by the middle of the new decade, accompanied by low levels of
    inflation and unemployment.
    ---------------------------------------------------------------------------
      \3\ In October, a major statistical revision adjusted real GDP
    upwards. The revision added about 0.4 percentage point to the recent
    growth rate of real GDP. That adjustment is reflected in this estimate.
    The revision is discussed in more detail in Chapter 1 of Analytical
    Perspectives.
    ---------------------------------------------------------------------------
      The longer-term economic and budget outlook also is favorable--even
    more so than only a few years ago. With prudent fiscal policy, the
    budget could remain in surplus for many decades. Still, there are
    foreseeable challenges that will threaten budgetary stability in the
    21st Century. In less than

    [[Page 31]]

    10 years, the ``baby-boomers''--the large generation born between 1946
    and 1964--will become eligible for early retirement under Social
    Security. In the space of two decades, the elderly's share of the U.S.
    population will jump from around 13 percent to 21 percent. This
    demographic bulge will put intense pressure on the Federal budget
    through Social Security and the Federal health programs, Medicare and
    Medicaid. Reforms will be needed to preserve the affected programs; and
    budgetary restraint will be needed to preserve this Administration's
    fiscal achievements.

      The Near-Term Economic Outlook: The Administration expects economic
    growth to moderate from its average pace of 4.3 percent per year during
    the past four years to 2.9 percent over the four quarters of 2000, and
    to an average of 2.5 percent in 2001-2003. Inflation should remain low.
    Recent growth has been much faster than mainstream forecasters have
    believed to be sustainable without higher inflation. The Administration
    projects that the more moderate pace of growth will keep inflation low.
      After more than a year of worldwide financial turmoil, most of the
    affected countries in South East Asia and Latin America appear to have
    turned the corner toward recovery, or at least to have arrested their
    declines. Korea, one of the countries where the crisis began in 1997,
    has been recovering rapidly in 1999. Other East Asian economies are also
    beginning to emerge from recession. Europe, which suffered stagnant
    growth for much of the 1990s, has begun to grow more rapidly in the past
    year. Among the major industrial countries, Japan alone is still in the
    very early stages of recovery.
      The worldwide economic crisis in 1997-1998 had very little effect on
    the overall U.S. economy. In 1999, growth continued at an average rate
    of 4.2 percent. Despite an adverse trade balance, strong consumer and
    invest

    [[Page 32]]

    ment demand kept the economy healthy. Looking ahead, mainstream
    forecasts, like the Administration's, expect some moderation in the
    growth of domestic demand in 2000. Consumer spending has been outpacing
    income growth, and cutting into personal saving; with the household
    saving rate at a record low, consumption may grow more slowly in the
    future. Business profits, which had been growing at double-digit rates
    from 1993 through 1997, have been rising more moderately since then.
    Profits are expected to continue to increase, but the unusually rapid
    growth is not projected to return. Furthermore, the rate of capital
    utilization is below its long-run average, which suggests that there
    could be some moderation in the rate of business investment as business
    finds less need to add to capacity (though businesses will continue to
    invest for modernization and to increase productivity). Though these
    developments could lead to more moderate economic growth, the longest
    economic expansion in history is expected to continue.
      As the recent rapid increase of productivity growth moderates, the
    Administration estimates potential growth will moderate to 2.8 percent
    by 2007. Beginning in 2008, potential growth is expected to slow
    gradually as the retirement of the baby-boomers begins to cut into the
    growth of the labor supply.
      Beginning later this year, as economic growth moderates, the
    unemployment rate is projected to rise gradually, stabilizing at 5.2
    percent in 2003. Mainstream private-sector economic forecasters
    generally agree that inflation would be expected to accelerate when
    unemployment is under five percent. The modest anticipated increase in
    unemployment is expected to keep price inflation under control.
      After rising by 1.6 percent in 1998, the Consumer Price Index (CPI)
    has picked up somewhat in 1999, rising at an annual rate of 2.7 percent.
    Just as falling energy prices held down the average inflation rate in
    1998, rising energy prices drove it up in 1999. Economists often
    recompute the CPI excluding the volatile food and energy prices to get a
    clearer picture of the underlying (or core) rate of inflation. On this
    basis, inflation continued to decline in 1999; core CPI inflation,
    excluding food and energy, was only 1.9 percent. This was the lowest
    core rate of inflation since 1965, and it indicates that the faster
    inflation in energy prices was not passed through to other goods and
    services. The chain-weighted price index for GDP also increased somewhat
    faster in 1999 following an extremely low rate of increase in 1998.
    After rising 1.1 percent over the four quarters of 1998, it has
    increased at an average rate of 1.6 percent during 1999. It is projected
    to rise 1.9 percent in 2000 and 2.0 percent per year thereafter.
      Interest rates on Treasury debt fell to extremely low levels--under
    five percent--during the world financial crisis of 1997-1998. Since
    then, they have increased somewhat. Short-term rates--following three
    interest rate hikes by the Federal Reserve during 1999--are back to pre-
    crisis levels, while 10-year rates are also approaching their pre-crisis
    average. The Administration projections are close to the levels at the
    end of last year, when the forecast was completed, with the 91-day
    Treasury bill rate at 5.2 percent and the yield on 10-year notes at 6.1
    percent.
      The medium-term projections shown in Table III-1 should be thought of
    as the average behavior expected for the economy, not a precise year-to-
    year forecast. In some years, growth could be faster than assumed; in
    other years, it could be slower. Similarly, inflation, unemployment, and
    interest rates could fluctuate around the projected values. But these
    assumptions, taken on average, provide a prudent basis for projecting
    the budget. In recent experience, the economy has outperformed the
    consensus forecast, and the Administration believes that it can continue
    to do so if fiscal policy remains sound.

    [[Page 33]]

                                                                                 Table III-1.  Economic Assumptions \1\
                                                                              (Calendar years; dollar amounts in billions)
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Projections
                                                                                  Actual -----------------------------------------------------------------------------------------------------------
                                                                                   1998     1999     2000     2001     2002     2003     2004     2005     2006     2007     2008     2009     2010
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Gross Domestic Product (GDP):
      Levels, dollar amounts in billions:
        Current dollars........................................................    8,760    9,232    9,685   10,156   10,621   11,105   11,644   12,236   12,847   13,477   14,118   14,777   15,471
        Real, chained (1996) dollars...........................................    8,516    8,850    9,142    9,393    9,629    9,870   10,146   10,451   10,758   11,064   11,360   11,655   11,958
        Chained price index (1996 = 100), annual average.......................    102.9    104.3    105.9    108.1    110.3    112.5    114.8    117.1    119.4    121.8    124.3    126.8    129.4
      Percent change, fourth quarter over fourth quarter:
        Current dollars........................................................      5.9      5.2      4.8      4.6      4.6      4.5      5.0      5.1      4.9      4.9      4.7      4.7      4.7
        Real, chained (1996) dollars...........................................      4.6      3.8      2.9      2.6      2.5      2.5      3.0      3.0      2.9      2.8      2.6      2.6      2.6
        Chained price index (1996 = 100).......................................      1.1      1.4      1.9      2.0      2.0      2.0      2.0      2.0      2.0      2.0      2.0      2.0      2.0
      Percent change, year over year:
        Current dollars........................................................      5.5      5.4      4.9      4.9      4.6      4.6      4.9      5.1      5.0      4.9      4.8      4.7      4.7
        Real, chained (1996) dollars...........................................      4.3      3.9      3.3      2.7      2.5      2.5      2.8      3.0      2.9      2.8      2.7      2.6      2.6
        Chained price index (1996 = 100).......................................      1.2      1.4      1.6      2.0      2.0      2.0      2.0      2.0      2.0      2.0      2.0      2.0      2.0

    Incomes, billions of current dollars:
        Corporate profits before tax...........................................      782      845      842      828      827      824      852      892      933      971    1,001    1,034    1,062
        Wages and salaries.....................................................    4,186    4,470    4,711    4,942    5,161    5,388    5,629    5,892    6,176    6,458    6,747    7,039    7,342
        Other taxable income \2\...............................................    1,990    2,088    2,161    2,231    2,293    2,356    2,431    2,518    2,609    2,703    2,802    2,904    3,015

    Consumer Price Index (all urban): \3\
        Level (1982-84 = 100), annual average..................................    163.1    166.7    171.0    175.1    179.6    184.3    189.1    194.0    199.0    204.2    209.5    215.0    220.6
        Percent change, fourth quarter over fourth quarter.....................      1.5      2.7      2.3      2.5      2.6      2.6      2.6      2.6      2.6      2.6      2.6      2.6      2.6
        Percent change, year over year.........................................      1.6      2.2      2.6      2.4      2.6      2.6      2.6      2.6      2.6      2.6      2.6      2.6      2.6

    Unemployment rate, civilian, percent:
        Fourth quarter level...................................................      4.4      4.1      4.3      4.7      5.1      5.2      5.2      5.2      5.2      5.2      5.2      5.2      5.2
        Annual average.........................................................      4.5      4.2      4.2      4.5      5.0      5.2      5.2      5.2      5.2      5.2      5.2      5.2      5.2
    Federal pay raises, January, percent:
        Military \4\...........................................................      2.8      3.6      4.8      3.7      3.7      3.2      3.2      3.2       NA       NA       NA       NA       NA
        Civilian \5\...........................................................      2.8      3.6      4.8      3.7      3.7      3.2      3.2      3.2       NA       NA       NA       NA       NA

    Interest rates, percent:
        91-day Treasury bills \6\..............................................      4.8      4.7      5.2      5.2      5.2      5.2      5.2      5.2      5.2      5.2      5.2      5.2      5.2
        10-year Treasury notes.................................................      5.3      5.6      6.1      6.1      6.1      6.1      6.1      6.1      6.1      6.1      6.1      6.1      6.1
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    NA = Not Available.

    \1\ Based on information available as of late November 1999.

    \2\ Rent, interest, dividend and proprietor's components of personal income.

    \3\ Seasonally adjusted CPI for all urban consumers.

    \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.

    [[Page 34]]

    The Budget Outlook

      The Administration projects budget surpluses in 2000 and throughout
    the customary 10-year budget window. The unified surplus should reach
    $167 billion in 2000 and $184 billion in 2001, while the on-budget
    surplus remains in surplus.

      The Long-Term Budget Outlook: All budget projections contain elements
    of uncertainty, which are compounded as they extend further into the
    future. However, long-run budget projections are both valuable and
    necessary to identify future problems, thereby allowing policy makers to
    devise solutions on a timely basis. In the 1980s and before, budget
    projections were extended for no more than five years. In the 1990s,
    attention has increasingly focused on the outlook for 10 years and even
    longer, especially when it has been necessary to consider longer-term
    issues such as the aging of the population and possible reforms to
    Social Security.
      The swift reduction of the budget deficit and the appearance of the
    surplus since the passage of OBRA in 1993 and the BBA in 1997 bodes well
    for the long run. Without the changes enacted in OBRA, the Federal
    deficit was projected to spiral out of control. Following the changes in
    OBRA, projections in the 1997 Budget showed a unified budget surplus
    beginning in 2002 and lasting for about 20 years; but the budget was
    projected to return to deficit in the long run. Since then, however, the
    economy and the budget have performed much better than projected,
    reducing the accumulated debt at the start of the long-run projections
    and thereby extending the projected surpluses for many decades. The
    current budget projection shows surpluses lasting until mid-century (see
    Chart III-8).
      However, such projections are inherently uncertain, because, while
    prudent fiscal policy can safeguard our hard-earned prosperity, so too
    can reckless choices dissipate the benefits of the budget discipline
    that is responsible for our ongoing success. Strengthening Social
    Security and Medicare will lay a strong foundation to safeguard our
    hard-won fiscal stability and rid the United States of debt for the
    first time since 1835. Preserving fiscal discipline must include
    strategic investments and reform of these essential age-related
    entitlement programs. It must also include budget tools that have been
    essential to enforcing discipline, and the 2001 Budget proposes spending
    caps and PAYGO rules that work. The favorable long-term results shown in
    these projections will require prudent policy--choosing continuing
    reductions in outstanding debt over expensive tax cuts or spending
    increases--and avoiding adverse economic shocks that could knock the
    projections off track. However, ordinary business cycles should not
    affect the projections if economic assumptions prove on average accurate
    over time. (For more details on the long-run budget projections see
    Analytical Perspectives, Chapter 2, ``Stewardship.'')
      The Clinton Administration's policy initiatives extend the solvency of
    Social Security and Medicare, protect current and future beneficiaries,
    and eliminate the publicly held debt. Restoring confidence in these
    vital programs is an Administration priority. The improvements in the
    long-term budget outlook illustrated here will offer the opportunity to
    get the job done.

    [[Page 35]]

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                                             Investing in Federal Statistics

      Our democracy and economy demand that public and private leaders have unbiased, relevant, accurate, and timely
    information on which to base decisions. Data on population, real GDP, the CPI, and the trade deficit, for
    example, are critical inputs to monetary, fiscal, trade, and regulatory policy. They also have a major impact on
    Government spending, budget projections, and the allocation of Federal funds. Taken together, statistics
    produced by the Federal Government on demographic, economic, and social conditions and trends are essential to
    inform decisions that are made by virtually every organization and household.

      Rapid changes in our economy and society, including the unprecedented growth of e-commerce, have meant that
    the current funding levels of the Government's statistical agencies have not kept pace with the need for good
    statistics. The relevance and accuracy of some of our Nation's key statistics are in question. Without the
    improvements proposed in this budget, it will become more difficult for our statistical system to mirror our
    economy and society accurately, which, in turn, could undermine core Government activities, such as the accurate
    allocation of scarce Federal funds. Fortunately, the most serious shortcomings of our statistical infrastructure
    could be substantially mitigated by proposals set forth in the Administration's budget. These initiatives are
    documented in greater detail in Chapter 11 of Analytical Perspectives, ``Strengthening Federal Statistics.''

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    [[Page 36]]

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                                                 Saving Social Security

    For more than 60 years, Social Security has formed the bedrock of income security for millions of Americans. For
     individuals who grow old after a lifetime of work, who become disabled, or who suffer the death of a family
     breadwinner, Social Security represents America's promise to stand by them.

    The pending retirement of 76 million baby boomers will put significant pressure on the Social Security system,
     which is self-financed through payroll taxes and income taxes on Social Security benefits. These dedicated
     revenues go into the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds.
     Currently, the revenues to these trust funds exceed the benefit payments going out. The surplus is invested in
     Treasury securities, which generate interest income for the trust funds. However, the system is not in balance
     over the 75-year period traditionally used by the Social Security Trustees to evaluate the financial status of
     the program. Under the Trustees' current projections, Social Security benefit payments will exceed dedicated
     tax revenues starting in 2014. By 2022, benefits paid out will exceed total tax revenues plus interest income--
     without any policy changes, the trust funds will have to draw on their reserves to meet benefit obligations. By
     2034, those reserves are projected to be exhausted. At that time, payroll taxes are projected to cover only 71
     percent of currently promised benefits. Two key demographic factors affect Social Security's financial status:
     the baby boomers and subsequent generations are living longer, and they are having fewer children.
     Consequently, they will spend more time in retirement, and there will be fewer younger workers paying into the
     system relative to the number of retirees.

    The President's Plan

    Restoring the Social Security trust funds to long-range solvency is one of the President's top priorities. He
     led the way in 1998 with a series of regional bipartisan forums to build public awareness of the problem, and
     to build public consensus for solutions. In 1999, the President proposed a framework built on the principle of
     maintaining long-term fiscal responsibility--ensuring that the benefits of fiscal discipline be used to extend
     the life of Social Security while also making prudent investments in activities that enhance the Nation's
     economic performance. Such a framework is crucial, because the Government's ability to pay future Social
     Security benefits is tightly linked to the long-term economic and budgetary outlook.

    This year, the President urges the Congress to adopt his program to save Social Security through a commitment to
     sustained fiscal responsibility. Rather than dissipate all of the currently projected on-budget surpluses on
     new spending or tax cuts, the President proposes a balanced approach to prepare the Nation for the challenges
     ahead by paying down the entire debt held by the public by 2013 and encouraging economic growth.

     Extend Social Security Solvency through Debt Reduction: The President's sustained commitment to saving
     Social Security has led to an acceptance of the vital importance of protecting the Social Security surplus.
     However, the next step in saving Social Security is to truly protect Social Security by dedicating the
     resources needed to extend the solvency of the program. The President proposes to devote the entire Social
     Security surplus to paying down and eliminating the debt held by the public. Creating a debt-free United States
     will eliminate debt service costs and result in substantial interest savings. Devoting Social Security
     surpluses to debt reduction will reduce interest payments from $230 billion in 1999 to zero in 2013 and will
     dedicate interest savings to extend Social Security solvency to 2050. Paying down the publicly held debt will
     improve the Nation's ability to respond to Social Security's future needs.

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    [[Page 37]]

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                                            Saving Social Security--Continued

     Transfers to Extend Social Security Solvency: The President proposes to devote the rewards of fiscal
     discipline to extending the life of Social Security. The substantially lower interest burden on the Federal
     budget will free up on-budget resources that can be transferred to the trust funds to extend their solvency.
     The President proposes to transfer part of the on-budget surplus to the trust funds from 2011 through 2050--
     fully justified by the annual interest savings attributable to dedicating the Social Security surpluses to debt
     reduction. The annual transfer would be $100 billion in 2011, growing through 2015, after which it would stay
     level at $211 billion. The framework includes an added safeguard to ensure that the transfers will not exceed
     the currently projected on-budget surpluses.

      The President also proposes to invest half of the transferred amounts in corporate equities. The share of
     trust funds invested in equities will be limited to 15 percent. The transfers of interest savings alone would
     extend the solvency of the trust funds from 2034 to 2050, investment in equities would extend solvency to 2054.

     Promote Long-Term Fiscal Responsibility: The President proposes to extend existing budget enforcement
     laws from their current scheduled expiration date in 2002 to 2010. These laws control discretionary spending
     levels and require new permanent spending increases or tax cuts to be offset fully by other spending cuts or
     revenue increases. The President also proposes to prohibit legislation that would cause or increase an on-
     budget deficit relative to the current baseline. These budget enforcement protections promote the fiscal
     discipline that is a critical feature of the President's program.

     Reforms to the Social Security program: The President encourages Congress to work with him in a
     bipartisan fashion to close the rest of the 75-year solvency gap through sensible reforms to the Social
     Security system. As part of a larger reform plan, the President is committed to improve income protections for
     elderly women who experience high poverty rates relative to the overall elderly population. In addition, the
     President believes that an overall Social Security solvency agreement should remove the barriers to work that
     result from the current Social Security earnings test. Social Security's rules discourage retired individuals
     from working, because their benefits are reduced when their earnings exceed a certain level.

    The best way to ensure our ability as a Nation to meet future Social Security benefit obligations is to increase
     national income, thereby improving the Government's fiscal position. This can be accomplished by paying down
     and eliminating the Nation's publicly held debt, which frees up resources for private investment and reduces
     Federal interest payments, and by making targeted investments in areas such as education and research where
     there is a high payoff in increased productivity.

    The President believes it is critical to address Social Security's financing shortfall now. The healthy American
     economy and the budget surplus provide a rare opportunity to tackle this problem from a position of strength.
     Addressing the issue now expands the number of options available for dealing with the problem and allows
     sufficient time to engage in careful deliberation and develop a well-thought-out plan that protects vulnerable
     populations. And making decisions now will allow individuals sufficient time to adjust their retirement
     planning, if necessary. The President believes that, working together, the Administration and Congress can
     fulfill America's long-standing promise to future generations.

      ----------------------------------------------------------------------