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Winners and Losers In a Balanced Budget

By Steven Pearlstein and Clay Chandler
Washington Post Staff Writers
Sunday, May 4 1997; Page A18

Like the fabled feud between the Hatfields and the McCoys, the partisan battle over a balanced budget has been going on so long that many Americans have long since forgotten what it means to them.

Quite a bit, it turns out.

Most economists agree that balancing the federal budget, if government really manages to pull it off, would prompt interest rates to fall, savings and investment to rise, the trade deficit to shrink and the economy to grow faster over a longer period of time. Future generations would not be required to lower their standard of living so the current generation can continue to live beyond its means.

"The simple way to think of it is that, over a period of time, we'd all be richer," said Martin Baily, who recently left the White House Council of Economic Advisers to join the consulting firm McKinsey & Co.

Well, not all of us. Because the deal also entails cuts in government spending, a good number of Americans would lose something, particularly lower income Americans who rely disproportionately on government services and income support programs.

But the average household would likely enjoy an ongoing "bonus" from a balanced budget, in the form of lower payments on the national debt, lower interest payments on private debts, higher wages for workers and higher profits for shareholders. A quick calculation puts that bonus as high as $1,000 per year for a typical household by 2005.

Of course, actual results will vary widely from year to year and from household to household and any number of things could go awry.

The agreement announced Friday by President Clinton and congressional Republicans is merely a fiscal outline: Before it can become law, it must pass through 26 different appropriations panels, two tax-writing committees, both houses of congress, and then receive the president's signature. There will be plenty of time for special-interest groups to try to water it down.

And if the booming economy should suddenly turn sour, it would throw off the projection.

Aside from the generalized benefits of a healthier economy, there are likely to be groups of discreet winners and losers when all the details are finally nailed down.

Potential losers, based on sketchy details emerging from the negotiations, are employees and investors in hospitals, medical practices and health maintenance organizations that will see reductions in government reimbursements for their services under the Medicare program; middle income elderly people, whose Medicare premiums would rise; government employees, more of whom will have to find work in the private sector; and the poor.

Beneficiaries would include those who are aided by tax breaks still to be written by Congress. They could include middle income families with young children (through an income tax credit), college students (through tuition tax credits and higher scholarship grants) and investors (through lower taxes on profits from the sale of stocks, bonds and family businesses and expansion of individual retirement accounts).

Not all of these potential gains and losses, however, are likely to be as large and direct as they first appear.

A $500 child tax credit that Clinton and some Republicans have proposed, for example, could work out to significantly less. Providing a full credit to all 81,000 American children 17 and younger likely would cost $40 billion – a third of the $135 billion set aside for tax cuts. But to leave more money for more powerful constituencies, lawmakers might reduce the cost of the child credit by disqualifying families with above average incomes or teenagers.

Similarly, college students may find some of the benefit from a $10,000 tax deduction for tuition, another idea being floated, may gradually be eaten away once colleges realize they can raise fees and tuitions without pricing themselves out of the market.

On the spending side, cuts in Medicare payments may appear as if they come out of the pockets of rich doctors and big hospital chains. But health economists warn that if history is any guide, those doctors and hospitals would figure out a way to make up the difference by raising fees to private patients or skimping on the quality of care.

Lower interest rates resulting from a balanced budget also would cut two ways: they certainly help homeowners and other heavy borrowers, but they tend to lower incomes for savers, particularly the elderly.

Twenty years of unprecedented federal deficits already have put upward pressure on interest rates. A deal to balance the budget within five years would have no impact on the accumulated $5.5 trillion federal debt, the interest payments that already consume 15 percent of the budget. But at least a balanced budget would stop that debt burden from getting worse.

From one angle, of course, the deal struck last week does not really balance the federal budget, at least not in the way most Americans or even most corporate accountants would think of balance. That's because, under the government unified accounting rules, the $80 billion to $100 billion annual surplus that is building up in the Social Security System in anticipation of the baby boomers' retirement is counted as "revenue" rather than what it really is: an obligation to pay it out 20 or 30 years hence, with interest.

"The real standard against which a budget should be measured is whether it addresses our long-term fiscal problems and reaches balance in a way that the sacrifices required are equally shared," said Robert Greenstein, director of the Center on Budget and Policy Priorities. Greenstein argues that the budget deal announced last week disappoints on both counts, noting the package of tax cuts envisioned by the plan skews heavily in favor of upper-income families.

Although final details are to be worked out, sources indicate Clinton would accept a cut in the capital gains tax – the tax paid by investors on profits from the sale of stocks, bonds and real estate – to 19.6 percent from 28 percent. According to Citizens for Tax Justice, 85 percent of the benefits of such a cut would go to the richest 5 percent of households with annual incomes of more than $100,000.

Proposals to raise the value of estates that are exempted from the inheritance tax – currently $600,000 per person – also would benefit only the wealthiest 1 percent of households.

But Treasury Secretary Robert E. Rubin argues that the broader benefits to society from a balanced budget outweigh concerns one group may come out better than another.

Balancing the budget, he said in a recent interview, was a "threshold issue." Failing to eliminate the deficit at this moment of remarkable prosperity and global influence, Rubin said, would only prove to cynical voters here and wary investors abroad that the United States "was a nation that simply couldn't handle itself."

© Copyright 1997 The Washington Post Company

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