Clinton Signed His Balanced Budget Agreement with Gingrich Into Law On This Date

On August 5, 1997, President Bill Clinton signed the Balanced Budget Act & Taxpayer Relief Act into law, which enacted a combination of reforms to Medicaid & Medicare along with tax cuts to balance the budget. The bills, negotiated in partnership with House Speaker Newt Gingrich (R-GA), laid the economic & fiscal groundwork for four years of federal budget surpluses from 1998-2001 ― the first consecutive surpluses since 1956-57 and the last time the federal government didn’t operate at a budget deficit.

Why did it come up?

Throughout the 1970s, the budget deficit was consistently over $50 billion for the first time in U.S. history aside from World War II. The economy entered a period of stagflation (high unemployment & rising inflation) until the early 1980s, when it bounced back after President Ronald Reagan enacted a series of tax cuts and ramped up defense spending during the Cold War buildup. Those policies drove annual deficits into the $100 billion to $220 billion range for the rest of the decade.

The deficit reached what was then an all-time high of $290 billion in 1992, but began to decline after Clinton & the Republican Congress led by Gingrich enacted reforms to welfare programs after a series of partial government shutdowns in 1995-96. With the 1997 deficit coming in at $22 billion ― the first sub-$100 billion deficit since 1980 ― Clinton & Gingrich were in position to eliminate the deficit altogether.

What did it do?

The package included two bills, the Bipartisan Budget Act of 1997 and the Taxpayer Relief Act of 1997, which contained reforms to the tax code, Medicaid, and Medicare which taken together brought the federal budget into balance. Both were introduced by then-House Budget Committee Chairman John Kasich (R-OH).

The Balanced Budget Act aimed to save $116.4 billion over five years and $393.8 billion over 10 years. It included the following key provisions:

• Medicaid Reforms: It limited growth rates in payments to hospitals, physicians, nursing homes, and community health centers; and capped federal matching payments to states for disproportionate share hospitals.
• Children’s Health: It created the State Children’s Health Insurance Program (SCHIP) under Medicaid as an optional block grant program states could participate in to boost insurance rates for uninsured, low-income children who weren’t eligible for Medicaid. 
• Medicare Reforms: It created Medicare+Choice (which was later renamed Medicare Advantage); reduced payments to Medicare managed care plans to slow their growth rate; and increased Medicare premiums while reducing co-pays and deductibles.

The Taxpayer Relief Act also introduced included the following key provisions:

• Child Tax Credit:  A tax credit of $400 (and later $500) was available for each child under age 17 and phased out for higher-income families.
• Retirement & Education Savings Accounts: It created Roth IRAs and made the retirement accounts and education savings through the Hope Scholarship Credit & Lifetime Learning Credit.
• Capital Gains & Estate Taxes: The sale of a personal residence was exempt from capital gains taxes up to a certain threshold ($500k for married tax filers & $250k for individuals). An estate tax exemption was gradually increased from $600k to $1 million.

Both bills passed Congress with bipartisan support:

• The Balanced Budget Act passed the House on a 346-85 vote with 52 Democrats & 32 Republicans opposed, while the Senate approved it on an 85-15 vote with 13 Republicans & two Democrats opposed.
• The Taxpayer Relief Act cleared the House on a 389-43 vote with opposition from 41 Democrats, a Republican, and an Independent; while the Senate vote passed 92-8 with only Democrats opposed.

House Speaker Newt Gingrich (R-GA) said the budget deal demonstrated that “the American constitutional system works, that slowly, over time, we listened to the will of the American people, that we reached beyond parties, we reached beyond institutions, and we find ways to get things done.” In his remarks at the bill signing ceremony on August 5, 1997, President Bill Clinton said:

“The balanced budget I sign into law today will continue our successful economic strategy. It reflects the most fundamental values that brought us together. It will spur growth and spread opportunity. Even after we pay for tax cuts penny by penny, there will still be $900 billion in savings, including half a trillion dollars in entitlement savings over the next 10 years. It opens the doors of college to a new generation, with the largest investment in higher education since the GI bill 50 years ago. It makes it possible for the 13th and 14th years of college to become as universal as high school is today. It strengthens our families with the largest expansion in health care for children since the Medicaid program 32 years ago. It modernizes Medicare and extends the life of the trust fund for a decade. It helps our communities to rebuild, to move a million more people from welfare to work, to bring the spark of private enterprise back to our most isolated inner-city neighborhoods. It provides the largest tax relief to help families raise their children, save for the future, and pass on their home and a dream to the next generation. These tax cuts are the equivalent of a $1,000 raise in take-home pay for the average family with two children.”

What has its impact been?

The balanced budget agreement made good on its pledge for four years as the federal government brought in budget surpluses of $69 billion in 1998, $126 billion in 1999, $236 billion in 2000, and $128 billion in 2001. 

The terror attacks of September 11, 2001, marked the beginning of the War on Terror and increased defense spending for counterterrorism operations around the world. In 2002, the budget deficit returned with a $158 billion shortfall.

While budget deficits remained below $413 billion from 2003-07, the financial crisis and resulting recession caused the deficit to balloon from $459 billion in 2008 to more than $1 trillion for four consecutive years ― $1.414 trillion in 2009, $1.294 trillion in 2010, $1.3 trillion in 2011, and $1.087 trillion in 2012.

At that point, President Barack Obama & Republicans in Congress enacted the Budget Control Act of 2011 (aka “sequestration”), which sought to use spending caps and automatic reductions if those caps were exceeded to restrain the deficit. The deficit dropped to a decade low of $438 billion in 2015, before climbing back to $585 billion in 2016, $665 billion in 2017, and $779 billion in 2018.

The Congressional Budget Office (CBO) projects that the 2019 budget deficit will exceed $1 trillion for the first time since 2012, and with the sequestration budget caps now eliminated by the Bipartisan Budget Act of 2019 annual deficits will likely remain above $1 trillion until the federal government once again moves to restrain spending.

— Eric Revell

(Photo Credit: Maureen Keating - Library of Congress / Public Domain)