What If Clinton Had Never Balanced the Budget?

Picture the spring of 1998. Bill Clinton walks into a press event and announces something Washington had not seen since Neil Armstrong was still a fresh memory: the federal government is about to run a budget surplus.

Reporters cheer. Republicans look slightly annoyed that a Democrat got there first. Policy wonks start arguing about whether it was tax hikes, spending restraint, or a lucky economy. For a brief moment, the United States seems to have solved a problem that had haunted it since the Vietnam era: chronic deficits.

Now flip the reel. Imagine that surplus never arrives. Imagine the 1990s end the way the 1980s did, with red ink as far as the eye can see. That is the counterfactual here: what if Clinton had not presided over a budget surplus, and how would that have changed the politics and economics of the era?

To answer that, you first need to know what actually happened. Then you can start pulling on the threads that might have gone differently.

What actually produced Clinton’s budget surplus?

Clinton did not balance the budget with a single shock program or mass layoffs of federal workers. The surplus was the product of three main forces: the 1993 deficit reduction package, the 1997 bipartisan budget deal, and a roaring late‑1990s economy that threw off tax revenue like a slot machine on a hot streak.

In 1992, the federal deficit was about 4.7 percent of GDP. By 1998, the government recorded a surplus. From 1998 through 2001, the United States ran four straight surpluses, the only ones since 1970.

The 1993 Omnibus Budget Reconciliation Act was the turning point. Passed without a single Republican vote, it raised the top income tax rate, increased the corporate income tax rate on the largest firms, and raised fuel taxes. It also set caps on discretionary spending. Republicans attacked it as a job killer. Clinton’s own pollster warned it might cost Democrats the House in 1994. It probably did.

On the spending side, Clinton had already signed the 1993 National Performance Review plan, Al Gore’s effort to “reinvent government.” This was not a mass firing of bureaucrats, but it did shrink the federal civilian workforce by hundreds of thousands over the decade, mostly through attrition and early retirements, especially in the Defense Department as the Cold War drawdown continued.

Then came the 1994 Republican Revolution. Newt Gingrich and the new GOP majority wanted deeper cuts and a balanced budget in seven years. The 1995–96 government shutdowns were the result of that collision. Out of the wreckage came the 1997 Balanced Budget Act and a tax cut bill, both signed by Clinton. They tightened spending, especially in Medicare, while trimming taxes in ways both parties could live with.

The final ingredient was not passed by Congress. It was the economy. The late 1990s tech boom, low inflation, and strong productivity growth produced rapid GDP growth and rising incomes. Capital gains tax receipts soared as investors cashed in on the stock market. Social Security payroll taxes kept rolling in as employment stayed high. The deficit shrank faster than the models had predicted.

So what? Because the surplus was a mix of policy and luck, there are several realistic ways it might not have happened. Each path changes not only the fiscal numbers but also the political story of the 1990s.

Scenario 1: The 1993 tax hike fails in Congress

Start with the most fragile piece of the real history: the 1993 budget bill. In reality, it passed the House by a single vote and the Senate on Vice President Al Gore’s tie‑breaker. Several conservative Democrats nearly walked away. A few changed their minds only at the last minute.

In this counterfactual, one of those Democrats does not budge. The bill fails. There is no top rate increase on high earners, no corporate rate bump at the top bracket, no fuel tax hike, and no new deficit‑reduction framework.

What happens next?

First, the deficit stays higher through the mid‑1990s. The early 1990s recession had already pushed it up. Without the 1993 package, the Congressional Budget Office would have projected a more alarming path. Long‑term interest rates, which in reality fell after the bill passed, might stay higher. That would slightly slow investment and growth.

Second, Clinton’s political identity shifts. In real history, he spent his first term defending an unpopular tax hike that he argued was necessary for fiscal responsibility. Without that, he has less credibility as a deficit hawk. When Republicans sweep into Congress in 1994, they face a president who has not already put his party’s fingerprints on deficit reduction.

That changes the 1995–96 budget fights. Gingrich can paint Clinton as a big‑spending liberal who refused to raise taxes or cut spending. Clinton cannot point to a passed bill and say, “We already did the hard part.” The public blame for any government shutdowns might tilt more toward the White House.

In this world, the 1997 Balanced Budget Act either does not happen or looks very different. Republicans would push for deeper spending cuts and might succeed in forcing through a more conservative plan, especially if Clinton is politically weakened after 1994. The deficit might still fall, but the path would be more heavily weighted toward spending cuts, including in social programs.

By the late 1990s, the strong economy still helps. Tax receipts rise simply because incomes and profits are higher. But without the 1993 tax increases, the government collects less. Instead of a surplus in 1998, you might see a small deficit, then perhaps balance or a tiny surplus by 2000, if at all.

The politics of the surplus change too. Republicans could more credibly claim credit for any improvement, since the big deficit‑reduction law would be theirs, not Clinton’s. Clinton’s reputation as a “New Democrat” who tamed the deficit would be weaker. Al Gore would run in 2000 without the same bragging rights on fiscal discipline.

So what? Killing the 1993 bill likely delays or shrinks any surplus and hands more of the fiscal narrative to Republicans, which reshapes Clinton’s political standing and the 2000 election’s economic talking points.

Scenario 2: The tech boom fizzles and growth stays mediocre

Now hold the policy constant and change the luck. Assume Clinton passes the 1993 package. Assume the 1997 budget deal also happens. This time, the economy refuses to cooperate.

In reality, the United States in the late 1990s enjoyed a rare combination: low inflation, strong productivity growth, and rapid expansion in sectors tied to information technology. The stock market soared. Unemployment fell below 5 percent and stayed there. That produced a surge in tax revenue that no one fully predicted.

In the counterfactual, imagine that productivity growth stays stuck near early‑1990s levels. The tech sector grows, but there is no dot‑com frenzy. The stock market is healthier than in the 1970s or early 1980s, but not manic. Capital gains receipts are modest. Wage growth is slower.

Under those conditions, the same tax code yields less money. Spending caps from the 1993 and 1997 laws still restrain outlays, but not enough to push the budget into the black. The deficit shrinks from early‑1990s levels, yet never quite crosses the line into surplus.

Politically, this changes the tone of the fiscal debate. In real history, by 1999 both parties were arguing about what to do with “projected surpluses” for the next decade. Republicans wanted large tax cuts. Democrats talked about “saving Social Security first” by using surpluses to pay down debt. The idea that the United States might retire its publicly held debt within a couple of decades was actually discussed.

In the slow‑growth scenario, no one talks that way. There is no surplus to divide. The argument is over how fast to reduce the remaining deficit. Republicans still push for tax cuts, but their case is weaker if the deficit is not gone. Democrats defend the 1993 tax hikes as necessary, but they cannot point to a surplus as proof that the medicine worked.

The reaction to Clinton’s economic policy also shifts. In real history, many Republicans quietly accepted that the 1993 package had not wrecked the economy, even if they kept denouncing it in public. The booming late‑1990s made it hard to argue that higher top rates had strangled growth. If growth is mediocre instead, critics have an easier time blaming the tax hikes and regulatory choices of the administration.

On the left, some of the anger at Clinton’s embrace of deficit reduction and welfare reform might burn hotter. In real history, the strong job market softened the blow of welfare reform for many, since more low‑income workers could find jobs. In a weaker economy, the social costs of cutting cash assistance and restraining spending would be more visible.

So what? A weaker 1990s economy likely means no surplus at all, which blunts Clinton’s fiscal legacy, hardens partisan narratives about tax policy, and makes the late‑1990s feel less like a lost golden age and more like another slog.

Scenario 3: Gingrich wins the shutdown fight and forces deeper cuts

Finally, change the politics of 1995–96. In real history, the government shutdowns damaged Newt Gingrich and the Republicans. Clinton framed himself as the adult in the room. Public opinion mostly blamed Congress. That gave Clinton leverage in the 1997 budget talks.

In this counterfactual, imagine the shutdowns play out differently. Perhaps Clinton mismanages the messaging. Perhaps a scandal breaks at the wrong time. Perhaps the public is more inclined to see the shutdown as a needed shock to a bloated government.

If Republicans come out of the shutdowns with higher approval and a sense of mandate, they push harder. Their original “Contract with America” plans included deeper cuts to Medicare, Medicaid, and domestic discretionary spending than what was eventually enacted. They also wanted a balanced budget amendment to the Constitution.

In this world, the 1997 Balanced Budget Act is more aggressive. Medicare spending growth is squeezed harder. Domestic agencies see sharper cuts. Clinton, weakened, signs on to more than he did in reality, perhaps in exchange for only modest tax cuts rather than the more generous package Republicans wanted.

The fiscal result could be a surplus that arrives even earlier or is larger, but with a very different political story. Republicans would claim they forced Washington to live within its means. Clinton would be remembered less as the president who balanced the budget and more as the Democrat who surrendered to Republican austerity.

Public reaction would be mixed. Seniors and hospitals would complain loudly about Medicare cuts, as they did even under the real 1997 law. Federal workers in affected agencies would feel the squeeze. Some programs would be trimmed or eliminated outright, giving real substance to the “big government is shrinking” rhetoric.

On the other hand, deficit hawks across the spectrum would cheer. Bond markets might respond positively to a faster path to surplus. The late‑1990s debate about what to do with the surplus would be even more intense, since the pool of extra money would be larger. Republicans would push for large permanent tax cuts. Democrats, having already conceded on spending, might fight harder to use the surplus for debt reduction and social insurance.

So what? A Republican win in the shutdown fight likely yields a surplus that is more clearly associated with spending cuts, shifts the credit away from Clinton, and deepens partisan divides over the size and role of the federal government.

Which no‑surplus (or different‑surplus) world is most plausible?

Of these scenarios, the easiest way to erase the Clinton surplus is not to rewrite the politics but to change the economy. The 1993 and 1997 laws did matter. They raised revenue and restrained spending. But the scale and speed of the move from deficit to surplus depended heavily on the late‑1990s boom.

Economists at the time repeatedly revised their projections as tax receipts came in higher than expected. Capital gains taxes, in particular, were a surprise. That means a world with the same laws but slower growth is entirely plausible. In that world, the deficit narrows but never quite flips to black ink. Clinton still claims credit for improvement, but there is no headline about the “first surplus since 1969.”

The failure of the 1993 bill is also plausible. It really did hang by a thread. Had it failed, though, pressure to do something about the deficit would not have vanished. The early 1990s were full of anxiety about long‑term debt. Bond traders watched Washington closely. Ross Perot had won nearly 19 percent of the 1992 vote largely on a deficit‑reduction message. Some other package would likely have emerged, perhaps after the 1994 Republican wave, with a different mix of taxes and cuts.

The scenario where Gingrich wins the shutdown fight is less likely, because it requires a fairly dramatic shift in public attitudes about government services. The real shutdowns were messy and visible. National parks closed. Passport processing stopped. Federal workers were furloughed. Voters did not like it. For Republicans to “win,” you have to assume a public more willing to tolerate disruption in exchange for abstract fiscal goals.

All of this loops back to the original questions people often ask about the Clinton surplus: Was it massive cuts? Was it gradual reform? Did it reflect small‑government conservatism?

The cleanest answer is this: The Clinton budget surplus was the result of modest tax increases on higher earners, restrained growth in federal spending, and an unusually strong late‑1990s economy. It was not a mass firing of federal workers or a slash‑and‑burn of popular programs.

Republicans in the 1990s did not embrace Clinton as a small‑government ally. They denounced his 1993 tax hikes, fought him over spending priorities, and then, once the surplus appeared, argued that it proved their own case for tax cuts. Clinton, for his part, used the surplus to argue that a Democratic president could be trusted with the economy and the deficit.

So what? Because the surplus rested on both political choices and economic luck, it was fragile. Change the vote count in 1993, the growth rate in Silicon Valley, or the outcome of a budget standoff, and the United States might have entered the 2000s without that brief, almost nostalgic moment when Washington argued not about how to finance deficits, but about what to do with extra money.