The new math - how Bill Clinton's economic plan will increase the deficit - Column

In February President Clinton claimed his program would cut the deficit by $500 billion in four years. The number stuck. We now know, however, that the Clinton Administration was the first to use gross rather than net numbers in its budget presentation. The $500-billion figure did not subtract the $170 billion in new spending and tax cuts the President was simultaneously proposing. Eventually an additional year - 1998 - was tacked onto the plan to achieve the $500-billion net target.

In reality the entire concept of deficit "reduction" is suspect. The Administration's 1994 budget, for example, forecasts a modest decline in the deficit, from $322 billion this year to $250 billion in 1998. But most of this would have occurred anyway, the result of Social Security surpluses built into current law. When you net out Social Security, the deficit in 1998 becomes $341 billion, the same as last year's amount:

Under the Clinton plan federal spending would increase by an average of 3.9 per cent per year between 1993 and 1998, or twice the projected rate of inflation. The reconciliation bill is unlikely to alter this rate of growth. As a result the "largest deficit reduction package in history" will be accompanied by a whopping $1.0 trillion rise in federal debt over the next five years.

Another widely accepted claim is the 1 to 1 balance between spending cuts and tax increases. In Mr. Clinton's equation revenues from higher fees and excise taxes, stepped-up IRS enforcement efforts, and, most notably, the sharp increase in the tax on Social Security benefits are counted as "spending cuts." The Administration also pretends that defense cuts that have been in the pipeline for years are actually Mr. Clinton's, and that the projected reduction of debt service from lower interest rates is the result of presidential action. When the smoke and mirrors are cleared away, tax hikes outweigh spending cuts by a margin of 15 to 1, according to the Heritage Foundation.

On the tax side, the broad-based energy tax, for example, is scored as a $72-billion revenue increase over the next five years. This figure ignores the tax's projected economic impact: 500,000 jobs lost, and a 1 per cent reduction in GNP. The resulting loss in payroll, personal-income, and corporate taxes will reduce net energy-tax revenue to a mere $5 billion per year, according to the Institute for Research on the Economics of Taxation.

Equally questionable is the more than $100 billion in revenues attributed to raising the top personal-income-tax rate. Taxpayers are skilled at turning taxable income into non-taxed perks, deferring compensation, or simply working less. Martin Feldstein has shown that even a 5 per cent reduction in taxable income will mean a net reduction in taxes paid.

Fanciful tax estimates are not new. In its euphoria following the 1990 budget agreement, the CBO predicted that the deficit would plunge to a mere $29 billion by 1995. Since then the CBO has repeatedly lowered its revenue projections by amounts that now total more than $100 billion per year.

                   The Clinton Plan
                     ($Billions)

                                       Deficit
                                      ex Social   National
       Revenues   Outlays   Deficit   Security      Debt

1992    $1,091     $1,381    $290       $341       $2,999
1993     1,146      1,468     322        367        3,304
1994     1,251      1,515     264        323        3,574
1995     1,328      1,574     247        312        3,827
1996     1,413      1,625     212        288        4,053
1997     1,476      1,690     214        297        4,294
1998     1,531      1,781     250        341        4,575

Source: OMB.

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