The Clinton administration reached agreement with the Republican leadership Friday on a plan to balance the federal budget in five years, using a last-minute financial windfall to help forge a deal that could alter the nation’s economic and political landscape.
The pact came after years of bitter partisan wrangling, months of intense negotiations and several hours of high drama in which an astounding piece of news - that deficits over the next five years were likely to be $225 billion lower than the Republicans had previously projected - provided the final impetus to completing the deal.
In the end, that unexpected maneuvering room enabled both sides to claim victory in achieving their primary goals without undue political pain, although both the White House and the Republican leadership still had to rally support for the package within their own parties.
President Clinton argued that he had won new spending for education, health insurance for children, welfare benefits and other programs that he had made the core of his second-term agenda, all while protecting the elderly from big increases in their Medicare premiums.
“Like Americans of all political views, I have been deeply committed to this, but I wanted a balanced budget with balanced values,” Clinton said. “I believe we have got it today.”
Republicans exultantly claimed a prize that has eluded them for years, a big tax cut, including a reduction in the capital gains tax, as well as success in scaling back overall domestic spending and beginning to rein in the costs of Medicare and other entitlement programs.
“Under this budget agreement, official Washington must learn to make do with less, while Americans will keep more of what they earn, and they will be able to save it and invest it in their own families,” said Sen. Trent Lott of Mississippi, the Republican majority leader.
The agreement does not ensure that the budget will be balanced by 2002, because it cannot anticipate possible economic downturns or tax and spending decisions by a future Congress.
And although the agreement won far more support Friday from liberal Democrats and conservative Republicans than did the outline that circulated on Capitol Hill on Thursday, it must still go through a legislative process that provides opportunities for changes and conflicts.
In a broader sense, the agreement gave Clinton a chance at a place in history as the president who restored the nation to a degree of fiscal and economic health it has not enjoyed in decades, an assertion that was bolstered by the news Friday that unemployment had fallen to 4.9 percent, its lowest rate in 24 years.
For the Republican majority in Congress, it was a chance to repair its image as overly partisan and obstructionist and to take home to voters a fiscal austerity package that leaves them largely insulated from Democratic attacks.
That the two sides were able to reach an agreement with so little political pain was largely a function of the strong economy, and the resulting decline in the deficit. Even without a budget agreement, this year’s deficit is now expected to fall nearly 30 percent, to $75 billion, its lowest level relative to the size of the economy in more than two decades.
The federal budget was last in balance in 1969. It began growing rapidly in the early 1980s after President Ronald Reagan and a Democratic Congress enacted tax cuts and spending increases and hit a peak of $290 billion in 1992. Since then the deficit has steadily declined, thanks in part to tax increases pushed through by Clinton in 1993 over Republican objections but primarily to a long period of steady economic growth.
The deal’s major provisions, covering 1998 through 2002, include these:
A reduction in spending on nonmilitary domestic programs of $58 billion, about $12 billion more than Clinton had initially proposed. But the budget would provide $34 billion in funding for most of Clinton’s priority programs, including health insurance for up to 5 million children, the restoration of welfare benefits to legal immigrants and an expansion of the student loan and Head Start programs.
A reduction in the planned growth of Medicare spending by $115 billion, accomplished largely through reductions in payments to health care providers. Elderly beneficiaries would have to pay slightly higher premiums. The Medicare trust fund, which would otherwise go bankrupt in 2001, would remain solvent until 2007.
Tax cuts of $135 billion, partly offset by $50 billion in revenues from closing loopholes and extending existing taxes that would otherwise expire. The Republicans assured the White House that $35 billion of the reductions would be allocated to the president’s proposal for tuition tax breaks. The remaining $100 billion would be allocated to a reduction in the capital gains tax, a phased-in doubling of the amount exempted from estate taxes to $1.2 million and a credit for families with children.
The deal does not specify the size of the capital gains tax cut, but aides to Rep. Bill Archer, R-Texas, who heads the House Ways and Means Committee, said there appeared to be enough money available to reduce the top rate to the Republican leadership’s goal of 19.8 percent from 28 percent if the members of the committee agree to do so.
The cost of the tax cuts in the five years after 2002, a major impediment to a deal in the last few days, would be limited to $165 billion, a level that both sides agreed would not lead to a return of big deficits.
Although the broad outlines of the budget deal were in place by Thursday, it was completed Friday afternoon only after the negotiators agreed to tradeoffs made possible by the Congressional Budget Office’s dramatic decision on Thursday to slash its deficit estimates for coming years.
The new projections allowed negotiators to take out politically sensitive components of the deal like a sizable change in the cost-of-living formula for Social Security and to scale back cuts to Medicare and Medicaid.
The budget office told Republicans on Wednesday that it was working on new projections that would show the scope of the nation’s fiscal problems to be far smaller than anticipated. By Thursday, budget office officials had concluded that the deficit would be about $45 billion a year lower than they had previously projected, $225 billion lower over the five years covered by the budget deal.
The negotiators, however, had already decided on their own to use slightly more optimistic assumptions about the deficit.