Governor Bill Clinton

Senator Al Gore
Putting People First

1992

President Clinton November 10, 1996

President Clinton has pursued a disciplined but fair budget policy, working with Congress to make the tough choices that have dramatically cut the deficit while protecting the values that Americans share. He has cut wasteful and lower-priority spending while protecting safety net programs and investing in the future.

The results are clear: The deficit has fallen by a whopping 63 percent-from $290 billion in 1992, the year before the President took office, to $107 billion last year. Now, with this budget, the President proposes to build on that progress by balancing the budget for the first time since 1969.

Why must we finish the job?

What the Administration Inherited

Large budget deficits damage the economy, hurting taxpayers and discouraging businesses. The sharply higher deficits that began in 1981 have been a serious drag on the Nation's economic performance ever since.

The Debt and What It Means for the Average Citizen: The budget deficit is the annual amount that the Government spends in excess of what it receives in revenues. The Federal debt, by contrast, is the total of the

accumulated deficits that have not been offset by surpluses over the years.

At first blush, deficits may appear painless; they allow the Nation's leaders to avoid the hard choices needed to bring spending in line with revenues. But the Government must finance the debt that it accumulates, and the cost of doing so prevents the Nation from meeting future spending needs or cutting taxes.

The Government finances the deficit mainly by borrowing from the public, including foreign investors. The large deficits of the 1980s and early 1990s quadrupled the Federal debt. At the end of 1980, Federal debt held by the public was $710 billion. By the end of 1992, it had grown by $2.289 trillionto $2.999 trillion.1 Because the deficit has fallen under this Administration, the debt has risen more slowly, and, in fact, the ratio of the debt to our Gross Domestic Product (GDP) has declined. But until we balance the budget, the debt will keep growing.

In a sense, today's deficits are the legacy of the much larger deficits of the years from 1981 to 1992. The budget would be

This measure excludes the debt held in Federal trust funds. It counts only the debt held directly by private investors and the Federal Reserve System.

balanced today if not for the interest that we pay on the deficits accumulated in those 12 years.

The Federal Government paid $241 billion in interest last year-$241 billion that it could have spent in far more productive ways. If the Government were not paying interest at all, it could have used those funds to have a balanced budget and still have $134 billion left over-which equals half of the military budget, or about 40 percent of Social Security payments, or about 20 percent of income taxes.

How Deficits Have Damaged the Economy: The economy did not perform as well from 1980-1992 as before, partly due to the rise in Federal debt that marked the period. As this experience shows, persistent deficits reduce saving, raise interest rates, stifle investment, and cut the growth of productivity, output, and incomes.

During recessions, when private consumption and investment declines, Government borrowing to finance unemployment and other benefits and to make up for reduced income taxes maintains demand and helps to turn the economy around. But if deficits become "structural" that is, they persist even in good times-they can cause harm. That's what happened in the 1980s.

A structural deficit-especially when sustained for a long time, as in the 1980sdepletes the Nation's pool of saving. Saving provides the resources to build the new factories and machinery that generate tomorrow's incomes. National saving has two components:

• private saving (by individuals and businesses the net result of millions of savings decisions); and

investments.

With its massive deficits in the 1980s, the Government drained much of the pool. Worse, as Federal deficits were rising, private saving was falling, exacerbating the overall saving problem.

In each year of the 1960s, net national saving 3 totaled at least 10 percent of GDP (see Chart III-1). Since then, net saving has fallen substantially. After averaging about eight percent of GDP in the 1970s, the net national saving rate fell to five percent of GDP in the 1980s, and hit a low point of just 2.4 percent of GDP in 1992.

With less saving, interest rates remained high in the 1980s, choking off demand for private investment. Why? Because lower saving shrinks the pool of available funds. The Federal Government taps the pool first by selling its bills, notes, and bonds at auction, leaving private borrowers to compete for what's left. With so many would-be borrowers, and so little left to borrow, the competition forces interest rates higher.

Real interest rates-that is, the portion of the rate that exceeds inflation-were markedly higher in the 1980s than in the prior three decades. In real terms, short-term rates had actually been negative for much of the 1970s, but they averaged almost four percent in the 1980s; long-term real interest rates. were as much as much as two to three percentage points higher than in the prior three decades (see Chart III-2).

Under this Administration, saving has rebounded, mainly due to lower deficits. In the first three quarters of calendar 1996, net national saving averaged 5.4 percent of GDP. In fact, over 90 percent of the improvement in the net saving rate in the last four years is attributable to lower deficits.

Higher real interest rates in the early 1980s attracted foreign capital into the United States, driving up the dollar in foreign exchange markets. The foreign capital helped offset some of the fall in domestic saving and helped to cushion U.S. investment. But it came at a price. The higher dollar pushed up the U.S. trade deficit significantly, causing competitive problems for American manufac

3 That is, gross saving minus depreciation of the Nation's capital stock.

turers and industrial workers. The Nation entered the 1980s as the world's largest creditor; it left as the largest debtor.

Thus, big deficits unsettle potential investors-they raise interest rates, increase the risk of ballooning future Government credit. demands and higher inflation, and create uncertainty in the currency markets. In response, business decision makers and other investors will likely buy safer, shorter-term securities rather than risk their money in long-term commitments for new factories, machines, and other productive investments. As a result, investment declines, and the economy is poorer for the foreseeable future.

And, in fact, despite the increase in borrowing from abroad, net investment 4 fell in the 1980s. The share of net private domestic investment (including residential and nonresidential spending) fell from over seven percent to five percent of GDP (see Chart III-3).

4 That is, gross investment minus depreciation of the Nation's capital stock.

By 1992, the ratio of net investment to GDP had dropped to just 2.5 percent.

With the rise in net saving since then, net investment has rebounded. Equipment investment, which includes computer purchases, has risen especially rapidly-with the increases averaging 11 percent a year in inflation-adjusted terms.

The economy grew much slower in the 1980s than in prior decades, partly due to the fall in saving and investment. From the business cycle peak in 1960 to the peak in 1980, real economic growth averaged 3.7 percent a year-compared to 2.6 percent during the business cycle of the 1980s. By reducing national saving, the 1980s-era deficits held down capital formation enough to cut real potential GDP at the end of the decade by an estimated 2.5 to 3.5 percent. If incomes had been three percent higher in 1996, the average person would have had $600 more in disposable income to spend.