Looking Back 20 Years at the 1997 Balanced Budget Agreement

Blog Post
Tuesday, August 08, 2017

This past Saturday marked 20 years since President Bill Clinton signed the Balanced Budget Act of 1997 (BBA). The act was the result of an agreement with the Republican-controlled Congress designed to balance the budget by 2002.

It actually only took one year to achieve balance and the country had balanced budgets every year before 2002 -- but never afterwards. Hopefully, the lessons from the achievement and the ultimate failure of the agreement to create lasting budget surpluses will last longer than the surpluses themselves did.

One big takeaway from the agreement itself is to not despair that partisan politics will forever impede progress on responsible fiscal policy. Prior to reaching the agreement, budget disagreements between the Newt Gingrich-led “Republican Revolution” House of Representatives and President Clinton’s executive branch were at the time more intractable than at any point since the modern budget process began in 1974. The tumultuous time was marked by two government shutdowns and disputes over budget details big (Medicare and Medicaid cuts) and small (who won a coin flip to decide which party would present proposals first in a meeting).

Despite such rancor, and after the battles failed to produce policy achievements for either side, the parties decided their best option was to work out an agreement that gave each side something. There is no good reason why the same thing couldn’t happen soon in the current era of policymaking.

Another lesson is that hard policy choices are needed to make fiscal headway. The BBA was only the final piece of the legislative puzzle required to balance the budget. Before it came an agreement in 1990 between President George H.W. Bush and a Democratic Congress to raise taxes on high-income earners, and enact discretionary spending caps and Pay As You Go Rules (both of which remain, in some form, as part of the budget process today). Legislation passed in 1993 by a Democratic majority in Congress and President Clinton increased tax rates on higher-income earners, lifted the wage cap for Medicare taxes and increased the gasoline tax. Without that history, the BBA might not have succeeded either as a negotiation or in achieving the ultimate policy outcome.

Finally, we shouldn’t ignore the roles that fortune played in the agreement and its successes and failures.

The military drawdown at the end of the Cold War allowed for defense spending cuts that paved the way for bipartisan agreement on discretionary spending caps in both 1990 and 1997. The booming economy of the late 1990s was also a big factor in reducing deficits. While good budget policy certainly plays a role in economic growth, it clearly wasn’t the primary cause of the boom.

In the same vein, the recession in the early 2000s helped reduce budget surpluses along with increased defense spending after the September 11th terrorist attacks.

At the time of the budget agreement in 1997, The Concord Coalition congratulated policymakers for reaching a hard-fought agreement but warned that not only would partisan forces attempt to undo the work but that policymakers had to move towards more substantive reforms of Medicare and Social Security given the demographic and budget outlooks.

Ultimately, our fears were realized and the latter view won out as the surpluses were spent on tax cuts and a new prescription drug benefit, and between 2001 and 2010 the national debt nearly doubled relative to the size of the economy.

Instead of simply lamenting the squandered opportunities of the past, policymakers should look back to the lessons we can learn from the 1997 agreement and the time since to put the federal budget back on a sustainable fiscal trajectory.

As part of The Concord Coalition’s 25 Lessons Learned for our Fiscal Future initiative, later this week we’re highlighting three lessons that are related to this landmark agreement: