It's Back... Deficit Still Stalks Capital

IT'S still out there, lurking somewhere in Treasury Department figures. Many people in Washington may have forgotten that it's a problem. But before 1995 is more than a few months old, the federal deficit could well be back to haunt White House and Capitol Hill budgeteers.

The reason: the current race between Democrats and the GOP to cut taxes on the middle class. Many economists worry that Congress and the White House, in the end, won't agree on spending cuts large enough to offset the decline in revenues that would result from lower tax rates.

Clinton officials and the Republican leadership insist they're committed to slashing the budget. The free-spending '80s are over, after all.

But playing Santa to the public via tax cuts is easy. The Scrooge experience of real budget reduction is hard. If budget cuts are possible, why not use them to offset the $1.6 trillion in additional debt the US is already predicted to accumulate between now and 2002?

``To use budget reductions to pay for big tax cuts I don't think is wise,'' says Larry Chimerine, managing director of the Washington-based Economic Strategy Institute.

Furthermore, a tax cut unbalanced by spending reductions would throw a gasoline can of stimulus on an economy that's already flaming red-hot. The Federal Reserve might judge it necessary to hike interest rates yet further in response - an increase that could take from consumers the extra cash left in their pockets by a tax cut.

A middle-class tax reduction may be defensible on social-policy grounds, according to some economists. In the 1980s, those in the upper tax brackets saw their rates fall relative to the rest of the nation, while their incomes were rising rapidly.

Targeting a reduction toward moderate-income taxpayers with children is arguably a good way for the government to promote stable family life, while shifting more of the nation's tax burden onto the backs of wealthier citizens.

``It's not bad economics if you pay for it. But I would never support any tax reduction that wasn't fully financed'' through budget cuts, says Robert Shapiro, director of economic studies at the Progressive Policy Institute, a research organization affiliated with the moderate Democratic Leadership Council.

The Clinton plan

As of this writing, the details of President Clinton's new fiscal package had not been released. Reportedly, it contains a $50-billion reduction in taxes over five years, via a mix of tax credits for middle-class families with children and new deductions for education.

Proposed budget cuts to match the tax reductions may include a $1 billion slash in federal housing programs, big cuts in Energy Department science research and nuclear-weapons complex clean-up programs, and shrinkage of the Transportation Department and General Services Administration.

Rep. Richard Gephardt of Missouri, the House Democratic leader, weighed in earlier this week with a proposal to give tax breaks to families with children and incomes below $75,000. House Republicans, for their part, have been pushing tax credits for families with children and incomes below $200,000. This package, according to one GOP estimate, would cost the government about $20 billion a year in revenue forgone.

None of these proposals consciously aims to increase the deficit. The Clinton administration, for its part, has so far genuinely reduced the federal budget while in office. Bringing a constitutional amendment to balance the budget to a vote on the House floor is part of the GOP's much-promoted ``Contract With America.'' The Washington mood is one of fiscal austerity.

Responsible policy?

``Right now people are trying to outdo each other on the spending cut side of the budget,'' says Rudolph Penner, a former head of the Congressional Budget Office who is now an official at the accounting firm of Peat Marwick.

But the question is whether this dynamic will result in responsible long-range fiscal policy, Mr. Penner says.

He argues that big spending cuts may be possible - but they should be used entirely for deficit reduction, as the US budget will start rising drastically after the turn of the century when baby boomers begin retiring and drawing on Social Security and Medicare.

Right now Social Security is running in the black. But by 2010, it will begin turning sharply into the red.

If Social Security benefits are to be changed for future retirees it should be done now, notes Penner, to allow a phase-in period of some 15 years. But this week a commission led by Sen. Robert Kerrey (D) of Nebraska was unable to agree even on whether the big retirement program should be altered - pointing out the continuing danger of touching the so-called electrified ``third rail'' of American politics.

Among other things, Senator Kerrey himself proposed raising the retirement age under Social Security to age 70. According to commission figures, when the baby-boom generation retires, each retiree will be supported by only three working US citizens, as opposed to the current 1-to-5 ratio.