Budget Special Report
Navigation Bar
Navigation Bar

 Key Stories
 Links &

Budget Graphic
blue line
Robust Economy Could Erase Deficit by '98

By Clay Chandler and Eric Pianin
Washington Post Staff Writers
Wednesday, July 9 1997; Page A01

As President Clinton and Congress gear up this week for final negotiations to close a balanced budget deal, some fiscal experts are warning that the strong U.S. economy threatens to erase the deficit before Washington can claim credit for eliminating it.

In what could prove a public relations nightmare for Democrats and Republicans eager to boast about bringing spending and revenue into line for the first time since 1969, the economy's sustained vigor has generated an unexpected surge in tax receipts that could wipe out the deficit as early as next year – without any change in federal policies.

Administration and congressional officials said yesterday that a jump in taxes flowing into the Treasury in June suggests that, in the fiscal year ending Sept. 30, the deficit – the annual difference between what the federal government spends and what it collects in revenue – may fall to as low as $45 billion.

That figure would have only a slight impact in slowing growth of the national debt – the federal government's cumulative borrowings – which over the years has swollen to more than $5.4 trillion.

But it would be a sharp drop from the $67 billion deficit Clinton and the Congress had predicted for fiscal 1997 in their May 2 budget agreement, and about a third the size of the $126 billion deficit the administration had forecast in February. It also would be less than a fifth of the deficit's $290 billion peak in 1992.

Just two months ago, Clinton and the Republican leaders were congratulating themselves on reaching what they billed as a historic agreement on the outlines of a tax and spending plan that would result in balance by 2002. But many economists now say that goal is already within shouting distance – and probably could be attained much faster if the politicians would only keep on bickering, thereby precluding the passage of tax and spending proposals that are expected to push up the annual deficits over the next several years.

"I'm predicting a balanced budget by next year, but only if there's no budget deal," declared Kurt Karl, chief economist at WEFA Inc., an Eddystone, Pa.-based forecasting firm. "One more year of gridlock and we're home."

Balance by the next fiscal year is "not impossible at all" if there is no budget deal, concurs Bill Dudley, chief economist at the Wall Street investment bank Goldman Sachs & Co. With incomes rising due to the healthy economy and more investors paying taxes on their gains from the sale of soaring stocks, Treasury revenue is likely to continue rising, Dudley argued. "That could bring us pretty darn close."

Budget negotiators at both ends of Pennsylvania Avenue have come to view the Treasury's windfall as a mixed blessing. The extra revenue means balance can be achieved with fewer painful spending reductions and more popular tax cuts. But negotiators also worry that the recent flurry of good news could breed complacency just as the two-year struggle over tax and spending priorities has reached its most delicate phase.

One sign of that concern: GOP leaders in Congress have urged the administration to postpone the release of a regular midyear report by the White House Office of Management and Budget. "We would probably prefer to complete this work under the current estimates and get it done," House Majority Leader Richard K. Armey (R-Tex.) said yesterday.

The White House, for its part, seems happy to oblige. "It may not make sense for the administration to allocate resources from OMB and Treasury to complete a report that we believe could be out of date within three weeks," said OMB spokesman Lawrence J. Haas.

Such reserve from an administration that is usually eager to trumpet good economic news has prompted critics of this year's budget proceedings to cry foul. "The budget negotiators are still trying to create an artificial environment of crisis that does not exist today," charged Rep. Edward J. Markey (D-Mass.), who has argued for months that the budget and tax cut deal would only get in the way of a balanced budget. "If we did nothing," Markey argued, "the budget would balance itself."

Many economists dispute the notion that Washington can coast to a balanced budget without further legislative effort. "The business cycle hasn't been repealed," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis, who predicts annual budget deficits "in the $75 billion range" throughout the rest of the century in the absence of policy changes and warns that the added complication of a recession could send deficits shooting back up to $150 billion.

"We should not make the mistake of assuming today's good times will continue into eternity," Sohn admonished.

"There is a set of circumstances that could produce a zero deficit in 1998 or 1999," said former Congressional Budget Office director Robert D. Reischauer. "But that's like planning to draw four aces."

Congressional and administration officials argued yesterday that bipartisan cooperation on budget issues had contributed heavily to recent improvement in the deficit outlook by convincing financial markets that U.S. policymakers share a commitment to responsible fiscal policies.

"We're benefiting from a positive cycle of credibility on deficits leading to a stronger economy leading to lower deficits," said Gene Sperling, chairman of Clinton's National Economic Council. "It would be a profound mistake to return to the negative cycle of complacency and gridlock leading to less confidence, higher interest rates and bigger deficits."

They also warned that the failure of this year's negotiations could make it harder for the two sides to turn next to addressing the long-term budget challenges that lie ahead in the early part of the next century, when members of the baby boom generation reach retirement and begin drawing Medicare and Social Security benefits.

Some analysts noted, however, that the Republican and administration budget proposals do not address such long-term concerns, and call for a series of tax cuts that would reach maximum size beyond the 10-year horizon of the budget deal.

And earlier this week the Senate Budget Committee's GOP staff issued an analysis showing that the balanced budget bills just passed by the House and Senate didn't even meet their five-year deficit reduction targets.

According to the analysis, the House bill would fall $2.3 billion short of balance in 2002 while the Senate bill would fall $7.2 billion short.

© Copyright 1997 The Washington Post Company

Back to the top

Navigation Bar
Navigation Bar
yellow pages