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1993-02-17
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Investing in the Future:
Reducing the Deficit to Increase Private Investment
Why this plan?
The Federal budget deficit is too high, and must be reduced. But how fast?
A lower deficit will strengthen the economy in the long run by increasing
national saving, lowering long-term interest rates, and encouraging
private investment. But reducing the deficit too rapidly could weaken the
economy in the near term. Every dollar of Federal spending, worthy or
unworthy, is someone's income. If that income is cut, and that recipient
reduces his or her spending as a result, the loss of income cascades
through the economy. Tax increases produce the same effect. So deficit
reduction must be prudently sized, carefully timed, and coordinated with
other Government policies (and with the Federal Reserve's monetary policy)
to limit the economic cost.
The impact of a deficit reduction package on the economy is best measured
by the relative sizes of the two that is, by the amount of the deficit
reduction amount as a percentage of the gross domestic product (GDP). The
larger the deficit reduction at any given time, the greater the risk of
economic dislocation. History suggests that annual deficit reduction of
less than one-half of 1 percent of the GDP is safe, and that deficit
reduction of under 1 percent of the GDP is manageable, as long as the
Federal Reserve cooperates by easing the money supply. Further, to limit
that risk in a substantial program of multiyear deficit reduction, the
size of the bite out of the deficit should be held to a relatively even
percentage from year to year.
Relying on these principles, this Administration's economic program is
designed to impose policy deficit reduction savings of slightly less than
one-half of 1 percent of the GDP per year over four years. This pace
maintains a substantial margin of safety and provides the Federal Reserve
with ample notice to expand the supply of credit in compensation, but also
accumulates to a significant reduction of the Federal Government's drain
on the Nation's savings by the end of the period.
Apart from growth miracles, there are only two ways to reduce a deficit:
spending can be cut or taxes can be raised. Both are controversial and
bound to arouse vociferous opposition. We have attempted to put together a
balanced plan of deficit reduction that includes both spending cuts and
tax increases.
We believe the plan is fair. It spreads the necessary contributions
broadly. It does not bear heavily on any one group or region or industry.
The proposed spending cuts do not fall on the most vulnerable members of
our society, but on those best able to shoulder the cost. The tax
increases included in the plan fall disproportionately on the wealthiest.
They place a fair share of the burden of deficit reduction on those who
profited the most from the uneven prosperity of the last decade and who
enjoyed the greatest reduction in their share of the burden of Government.
Those earning more than $100,000 will contribute over 70 percent of the
total new revenue.
We believe that the specifics of the plan contain many desirable policies
that could be defended on their merits, quite apart from the need to
reduce the deficit. On the spending side, cuts have been aimed at
low-priority programs. The purpose of deficit reduction is to transfer
resources within the economy from low-priority uses to additional public
and private investments that add more to our economic strength. A changing
world makes some Government programs obsolete just as it leaves some
private businesses in abandoned corners of the marketplace. The
Administration proposes to rationalize or eliminate programs that have
outlived their usefulness; that provide unnecessary or excessive subsidies
to narrow groups at great expense to society at large; or that reduce the
overall efficiency of Government. Continued support for such programs
would weigh down the economy as a whole with a burden that can only grow
in the future. It is time to put the national interest ahead of the
special interests. On the tax side, the proposed new tax on energy will
encourage socially responsible behavior such as energy conservation and
environmental protection.
We also believe that the plan is bold. There is no way to reduce the
deficit without incurring the opposition of politically powerful groups
and lobbies. This Administration has not shrunk from proposing necessary
spending cuts or tax increases for fear of offending powerful interests.
Deficit reduction is essential to the economic health of the nation, and
all groups must contribute to the solution of this common problem.
Much of the deficit reduction that we propose can and should be legislated
in this fiscal year. Some of it, however, will depend upon actions in
later years that cannot be determined now. For this reason, we propose an
extension of the Budget Enforcement Act of 1990 to set the conditions for
decisions in the future; and we also propose an enhanced rescission
procedure that will give this President and all future Presidents the
opportunity to require a simple majority vote on individual spending
items. These procedural changes will safeguard the deficit reduction we
need.
The heart of the benefit from deficit reduction is the additional private
investment that it allows. Those investment dollars, driven to their best
uses by an intensely competitive marketplace, will add to wages for
workers and profit for entrepreneurs. However, the private sector also
needs tools that only the public sector can efficiently provide: the
skills and the infrastructure upon which businesses can build.
Accordingly, this Administration proposes to dedicate a modest share of
its deficit reduction about one dollar in five in 1997 to selected public
investments in physical infrastructure; technology development and
dissemination; environmental protection and energy conservation; the
education and training of our work force; incentives for work; and
preventive health care and public health. A further share of the deficit
reduction less than 10 percent will go toward tax incentives for private
investment and work effort.
This combination of increased private investment through deficit reduction
and targeted incentives and increased public investment through a
reorientation of Federal Government priorities will help to reverse the
self-destructive consumption binge of the last decade and to solidify the
economic base upon which our nation can grow in the competitive world of
the next century.
Based on cautious economic assumptions, this program will begin to rein in
the Federal budget deficit, which now is growing faster than the economy;
that is an unsustainable condition that will deal with us if we do not
deal with it. We chose that cautious base to avoid the overconfidence that
has led to foolish and impossible commitments in the past, and to the
resultant reversals of economic policies. However, the Administration is
confident that the additional public and private investment will stimulate
growth and reduce interest rates, both of which will narrow the deficit
gap still further. There remain unfinished economic policy tasks. Other
commitments must be addressed and other economic policies reformed. These
will be identified later in this report.
The Clinton Administration's approach to deficit reduction accepts change
as its point of departure. Because the world has changed, America's armed
forces must redefine their roles and missions, and translate those updated
missions into new resource requirements. Similarly, old verities no longer
work on the domestic side. Indeed, a drastic restructuring of Federal
priorities is overdue on both fronts.
Facing New International Challenges and Opportunities
While this report focuses on our economic plan, the nation faces a host of
new international challenges and opportunities that will affect the
prospects for domestic economic renewal. World economic growth, our
national security and the health of our domestic economy are integrally
linked. When our economy is growing, we have more strength in
international negotiations, our institutions and values hold more
attraction abroad, and our international engagement is more affordable and
sustainable. Moreover, our willingness to confront the global issues and
problems of the post-Cold War era will determine whether we will shape
global change in ways that advance our interests, or let those changes
engulf us. The agencies of government that defend and promote American
interests and values abroad must be redesigned to deal directly with new
international challenges and to operate efficiently in a streamlined
government.
This economic plan and the budget that will follow redirect and
reinvigorate our national security priorities and institutions to meet new
international challenges and take advantage of new opportunities. This
plan is an investment in preventing regional wars and international crises
that could consume scarce resources. It also invests in new initiatives
that will yield economic and environmental benefits for the American
people.
International Affairs
United States foreign policy seeks a world community increasingly
receptive to democracy, market economics and international cooperation as
we face new international challenges. While spending for international
affairs must share in the reductions we are carrying out across the
government, our budget plan has made room for a number of important new
initiatives, while maintaining those existing programs that advance our
enduring interests.
Few issues are more vital to our long-term security than the progress made
in Russia and other states, from Eastern Europe to Latin America and
Africa, toward democracy and the establishment of market economies. We
already have made a significant investment in supporting this evolution;
our new budget increases our commitment to progress in this area. For
example, we are committing funds to such new initiatives as a Radio Free
Asia, to carry news and hope to China and other Asian nations.
Our national security is also linked to helping prevent or resolve
conflicts that can grow out of ethnic, regional, or religious tensions
throughout the world. International peacekeeping and peacemaking
activities have increasing value in such conflicts. Somalia, Bosnia,
Cambodia and Mozambique provide current examples of multilateral
peacekeeping efforts; more such exercises are likely in the future. Our
budget plan accommodates the likelihood of greater peacekeeping
commitments.
The proliferation of weapons of mass destruction and the means of their
delivery poses a serious long-term threat to international peace and
stability. This administration is shaping a coherent non-proliferation
strategy, which will be supported by our budget plan.
The competitiveness of U.S. firms in the global market is another foreign
policy priority. We will create a dynamic two-way relationship with the
business community that responds to its needs rapidly and creates a more
level playing field for international trade.
We also plan to address more coherently the many challenges posed by the
degradation of the global environment, through strong support for
international agreements and programs to protect that environment. We are
building a strong base for a new approach to global environment problems.
Finally, our budget plan increases our commitment of resources to active
population programs, and significant on-going support for refugee and
humanitarian assistance festering problems that, unattended, will create
tomorrow's crises.
In order to fund these priorities and initiatives, we are also working to
streamline and modernize the structure of our national security machinery.
Some current programs, designed to meet the needs of the Cold War era,
need new focus. We are reshaping the Department of State, as well as the
Office of the Secretary of Defense and the National Security Council
staff, to give new strategic emphasis to problems such as assisting the
former Soviet Union, non-proliferation, new global issues and our economic
competitiveness. We are reviewing such programs as international security
assistance, development assistance, and information and broadcasting, many
of which were designed for the Cold War. We will be taking a close look at
future priorities for international development lending through
multilateral development banks, and at export guarantee and promotion
programs. Over time, we hope to restructure many of these activities,
streamline their operations or redesign them, while meeting our existing
international commitments and enhancing American interests.
National Defense
The world remains a dangerous place, but the nature of those dangers has
dramatically changed. Our military forces and intelligence capabilities
must, therefore, continually be redesigned in a changing world.
Unquestioned American military power remains essential to the success of
our diplomacy and to strengthening our international relationships.
Reducing the size of the military to provide funds for other needs,
therefore, is not our purpose. Rather, our goal is to reshape our forces
to provide us with the capabilities we need to defend our continuing
interests, deal with new problems and threats, and contribute to the
promotion of democracy, prosperity, and security in a new world.
Our defense strategy will be driven by a fresh assessment of the
challenges that require the use of American military force because they
threaten our interests or require our engagement. Many of these already
are known: from the continuing confrontation in Iraq, to our humanitarian
operations in Somalia. Other risks are equally real: the potential for new
conflict in such places as Korea or the Middle East; the international
dangers of ethnic, religious or regional conflicts in other regions, such
as the Balkans; and the proliferation of weapons of mass destruction and
the means of their delivery.
The forces we design to address these challenges will continue to be built
on the superb capabilities and training of our military personnel and the
continuing technological superiority of our weapons. The men and women who
proudly serve America in our military constitute the finest fighting force
in the history of the world; we must ensure they remain so. We are
determined to avoid a hollow military. Our defense program will fulfill
this promise. Together with active diplomacy and a strong economy, our
military will maintain deterrence, reduce the incentive for others to
proliferate, reassure our friends and democratic allies and discourage
potential adversaries, preserve freedom on the high seas, protect our
global economic interests, combat terrorism and drug-trafficking, and
enable us to take part in global peacekeeping and peacemaking activities.
These forces will be consistent with the design we have promised: 1.4
million men and women on active duty, a strong, integrated reserve and a
capable forward presence of roughly 100,000 troops in Europe. Our military
will be mobile (with the sealift and airlift it requires), agile (with new
technologies and integrated doctrine which allows it to dominate by
maneuver, speed and technological superiority), precise (to reduce the
loss of life in combat), flexible (to operate with diverse partners in
diverse regions), smart (with the intelligence and communications it needs
for the diverse threats it will face) and, especially, ready (given the
unpredictability of new threats).
Our defense planning also confronts a new fiscal and management challenge.
The most recent five-year budget projection of the previous administration
may underestimate the true costs of the forces and hardware in their plan.
In addition, we may well face greater than previously anticipated
liabilities, such as environmental cleanup costs at our bases and
facilities, as we downsize the Cold War defense establishment. Finally,
the budget we inherited may overstate the savings that would result from
planned defense management reforms and overhead consolidations. A task
force has been appointed to review this problem and report back to the
Secretary of Defense. Our defense plan delivers on the savings we
promised; we plan to deliver, as well, on our commitment to honest
budgeting and tight management in the Defense Department.
Our plan will also redesign defense administration and operations to carry
out new initiatives and face post-Cold War challenges. A restructured
Defense Department will focus on the new issues and threats, on sound
financial and cost management, on military personnel and readiness, and on
creating a streamlined, efficient acquisition process. In addition, we
intend to do more to integrate and harmonize the roles and missions of the
services.
Finally, we plan to attend to the needs and problems of the nation's
defense industrial and technology base, defining the core skills and
industries we require for our defense and working to integrate more
closely defense and commercial technology and manufacturing. As we reduce
the size of our forces, we must repay the debt of gratitude we owe to the
men and women in the services and the defense industries who have served
their nation over the past 45 years. Our budget plan includes a firm
commitment to assist the transition for military and civilian personnel to
private life and other work. Elsewhere, we have described our defense
reinvestment and transition program, including new technology investments
and programs, job retraining, and community diversification assistance.
This military program will also be affordable. Planned funding for
national defense over the next four years fulfills the promise of an
additional $60 billion in program savings. Combined with government-wide
pay and benefit changes and additional reductions to offset projected
underfunding, this program will yield $37 billion in outlay savings in
1997. (See Table 3-3.) We will implement those reductions carefully as
part of our effort to redesign the force. As we undertake a major
strategic review over the coming months, we will identify new changes,
savings and additions that will fit our new strategy.
TABLE 3-3. SUMMARY OF NATIONAL DEFENSE BUDGET ADJUSTMENTS
(In billions of dollars)
1997 Outlays
Bush adjusted baseline 287
Adjustments to baseline:
Program reductions/1 -26
Pay and benefit changes -6
Additional reductions to offset projected underfunding -5
Total adjustments -37
Revised budget level/2 249
Note: Details may not add due to rounding.