If rhetoric were reality, the news from Washington last week would suggest that it's no longer a question of whether the federal budget will be balanced, but when. President Clinton, who has resisted Republican calls for deep spending cuts for Medicare, Medicaid and federal agencies, did something Tuesday he has never done before. He offered a plan to balance the budget by a specific date, in this case, 2005.
That's three years later than the Republicans' target. But Washington watchers see significance -- and concessions -- in Mr. Clinton's plan. Even though the next decade's fiscal policy is still an unformed blob of proposals, the center of the budget debate seems to have shifted toward the conservative.
Mr. Clinton's plan would cut $1.09 trillion in federal spending over 10 years, compared with Republican-led House and Senate schemes that would trim $1.04 trillion and $961 billion, respectively, over seven years. While the White House budget would hurt Medicare and Medicaid less severely than congressional plans, it would still extract $178 billion in savings from those programs between now and 2005. Has Mr. Clinton's proposal boosted chances for a balanced budget? And if so, how will that affect the economy?
Senior vice president, Capitoline Investment Services
The fact that the president even has a balanced budget over 10 years is a capitulation. The move is on to balance the budget. Budget reform is as sincere and credible as it has ever been.
Commenting on the shape of the package is more of an academic exercise than a practical one. What the Clinton budget means is that the president is now a negotiator in the budget process for the coming year, when before he was not. He has received some heat from the Democratic left for abandoning their budget, but I think it's just a recognition of the political realities. This capitulation means that a balanced budget is now more than a rhetorical discussion.
This is encouraging news for financial markets. It's going to be encouraging to the Federal Reserve as they consider monetary policy this summer, and could lower interest rates for the average individual over the coming years. It wouldn't surprise me if this lowers longer-term interest rates over time by a full percentage point. We should look at this as a long-term secular trend as opposed to a one-shot deal. But if you combine a balanced budget with slower growth and lower inflation, that's an ideal environment for financial markets.
Chief economist, Mercantile Bankshares
This is a classic short-term vs. long-term trade off. The complicating factor is that the economy has slowed considerably and will continue to do so during much of this debate. This means that as the Congress and the president get down to actually working on details of a plan, they will not be able to debate in a vacuum but will be forced to adjust to an economy that is weakening even as they talk.
We've gotten into the habit of depending on the government to use some kind of fiscal stimulus to keep the economy from slowing too much. As the economy slows, a tax cut for this year will look more and more attractive, and the longer-term goal of budget cutting will be colored by the impact budget cuts have on the economy.
I believe this weakening economy will mean that the tax cut eventually agreed upon will be considerably higher than the president's proposal. What we're likely to see is a multi-year package of budget cuts alongside a fairly substantial immediate tax cut, designed both to stimulate the economy now and to offset the effect of budget cuts on an economy that is already slowing.
Chief economist, First National Bank of Maryland
I think (a balanced budget) is more doable now than it was before. This gives a little bit more of a chance to have the Fed ease on July 5 or 6. And with the announcement Tuesday, I felt a lot stronger about the dollar firming at this level. Granted, we're still talking between seven and 10 years down the road, so it's not going to have an immediate effect on us. But it affects the next generation, and that's what financial markets are all about.
As far as the economics (of the budget) go, the jury is still out. I believe that over the next few days, you're going to have the budget office look at the numbers a little more carefully. The big question is in the medical area -- where they'll go to make any cuts at all.
They're going to work out some sort of tax cut, too. I think that's going to come into play. I feel pretty good about a cut in the capital gains tax coming along. Therefore they can't do as much cutting as the Republican side was looking for.
With Clinton's budget, he's got to work on it quickly because there's an Oct. 1 debt ceiling he's got to face -- and the '96 elections.