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Decades-Old Era of Budget Deficits Ends

By George Hager
Washington Post Staff Writer
Wednesday, September 30, 1998; Page C10

This is the day many budget experts thought might never come. The fiscal year that ends tonight at midnight is the first since 1969 -- the year Neil Armstrong walked on the moon and 400,000 rock fans spent a weekend at Woodstock -- that the nation has recorded a federal budget surplus.

The amount of money is tiny -- about $63 billion worth of black ink in a federal budget that approaches $1.7 trillion. But the effects of swinging back from deficits of as much as $290 billion six years ago have been profound.

Economists say the government's shrinking need to borrow money to finance a budget deficit has freed up funds for businesses and consumers and helped drive mortgage rates down as much as three percentage points below what they would otherwise be.

"Is it a big deal? Yeah, it's a big deal," said David Wyss, chief economist for Standard & Poor's DRI. He said the average interest rate on a 30-year fixed-rate mortgage might be as high as 9.5 percent instead of its current level below 7 percent had deficits as large as those in the early 1990s continued.

"Psychologically, it's tremendously important," added Robert D. Reischauer, a senior fellow at the Brookings Institution and a former director of the Congressional Budget Office during some of the worst of the budget wars in the late 1980s and early 1990s. "Harry isn't going to look across the table at Louise October 1 and say, 'Boy, things are different now that we have a surplus,' " he said, but he added that "it shows that, despite all its flaws, our system works."

The end of the deficit has brought some budget peace to Capitol Hill, but it has ignited a different kind of warfare.

"The politics of the surplus are much more difficult than anybody anticipated," said Stan Collender, managing director of the federal budget consulting group at Fleishman Hilliard. "They don't know how to deal with it yet. . . . With the possible exception of [95-year-old South Carolina GOP Sen.] Strom Thurmond, who else up on the Hill remembers what it was like to deal with a surplus?"

Instead of the familiar sniping over whether and how much to raise taxes or cut spending, Republicans and Democrats are now fighting over whether to nick the surplus for "emergency" spending proposals for Bosnia, U.S. embassy security and other programs, or use it to pay for tax cuts.

Finally, in the Black

Fiscal 1998 is the first fiscal year since 1969 that the nation has recorded a federal budget surplus.


1992: $290 billion deficit

1998: $63 billion surplus

SOURCE: Congressional Budget Office

Some of the toughest combat has gone on among congressional Republicans, who Collender said are split into five warring tribes that variously want to cut taxes, cut spending, pay down the debt, spend more in general or spend more on things such as highways while cutting spending elsewhere.

So far the chief result of this intraparty warfare has been the failure of the GOP majority to agree on a budget resolution -- the first time that has happened since the law was changed in 1974 to give Congress that job. But with last year's budget deal setting spending limits already, about the only practical effect of not having a budget resolution is to hamper passage of GOP tax cuts in the Senate. Normally a budget spins off a "reconciliation bill," which can carry tax cuts and is immune to filibusters. Instead, Republicans would have to muster 60 votes to shut down any talkathon, which GOP leaders now concede is difficult or impossible.

Final figures on the surplus' exact amount won't be available until late October, but the CBO estimates the surplus is about $63 billion. President Clinton is expected today to unveil the official administration projection of about $70 billion, in line with what private forecasters are projecting.

Little more than two years ago, in May 1996, the CBO was forecasting a fiscal 1998 deficit of $194 billion. But their assumptions got turned on their head because over at the U.S. Treasury around the same time, one of the most vibrant economic expansions in history had begun kicking billions of extra tax dollars into federal coffers.

The unexpected revenue is what pulled the nation out of a deficit, and many economists say that might not have happened if Congress and two presidents had not helped spur a virtuous cycle early in the decade by focusing on deficit reduction.

In 1990, President George Bush reneged on his "no new taxes" pledge and cut a deal with the then-Democratic Congress for a budget package that included tax increases and spending cuts. It was extremely unpopular with Republicans and helped push Bush out of the White House when the 1990-91 recession overwhelmed any benefits from trying to shrink the deficit.

Similarly, President Clinton's 1993 budget package added more tax increases and spending cuts. It, too, was anathema to Republicans and contributed to the Democrats losing control of Congress to the GOP after 40 years in the 1994 elections.

Clinton and the Republican Congress agreed to a budget deal last year that both sides insisted finally balanced the budget, but analysts noted that it was far smaller than the earlier two budget deals. Forecasters didn't expect a surplus until 2002.

But, for the third year in a row, tax receipts in April surged past projected levels as investors cashed in on the stock market boom and paid part of their profits in taxes.

Economists also credit Federal Reserve Chairman Alan Greenspan's role. He signaled to markets that the Fed would not permit a resurgence of inflation while also cautiously allowing unemployment rates to drop below levels that economists once believed would create inflationary pressure. So far, they have not.

"It's the economy, Greenspan and then everybody else," said Ezra Greenberg, an economist who works with Wyss at DRI. "We all like to believe that the president of the United States and the Congress have this incredible ability to influence economic growth, but I think the evidence on that score is that they have a lot less influence than they think."

While most economists are celebrating the arrival of the first surplus since President Lyndon Johnson engineered one in 1969 with a temporary 10 percent surcharge on income taxes, some warn the surplus is an illusory byproduct of the excess Social Security taxes being collected to pay for baby-boomer retirements a decade or two from now.

"There is no surplus," said Robert Bixby, policy director for the Concord Coalition, an anti-deficit group. If Social Security trust fund money were subtracted from the fiscal 1998 budget, Bixby said, the $63 billion surplus would become a $41 billion deficit. "It's a good thing, don't get me wrong," Bixby said. But since the surplus is at best a debatable quantity, "Congress and the president should stop making plans to spend it."

Some conservatives laud the advent of a surplus but say it is not quite the one they had in mind, since it relies more heavily on taxes and less on spending cuts than they would like. On the other hand, it is still a milestone.

"As someone who has covered the budget for 15 years, I did not expect to see a balanced budget in my lifetime, so this is a great triumph," said Stephen Moore, director of fiscal policy studies for the libertarian Cato Institute. "For at least a day, we should sit back and celebrate."

© Copyright 1998 The Washington Post Company

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