Deficit Declines Even as Budget Rhetoric Rises

But less red ink doesn't mean all is OK

SURPRISE! While President Clinton and Congress clash over a seven-year balanced budget plan, with no final pact yet in sight, the actual US government deficit has been going ... down.

That's right, down. Given all the shouting in Washington you'd think federal spending is running amok in the streets, like the bulls of Pamplona. In fact, the deficit has been steadily declining for more than three years and is currently falling faster than many experts had predicted. When fiscal 1996 ends this fall the deficit should total around $145 billion - about half of the $292-billion peak it hit in 1992.

This doesn't mean deficit spending has been corralled for good. It does mean that a short-term crisis has eased, giving officials time to focus on a long-term problem: big deficits that could appear in the early years of the next century.

"We're not confronted with continuing runaway deficits," Federal Reserve Chairman Alan Greenspan told Congress last week. "We're confronted, at this stage, with a [deficit] delay."

Mr. Greenspan added that he expects Washington, in the end, will make progress in the long-term deficit fight, despite the loud volume of current budget arguments. Hardly anyone advocates big new spending programs anymore, he pointed out.

"There has been a sea change in the American public about the issue of deficits," the poker-faced Fed chief insisted.

If that's true, it may be about time - at least as far as a central banker is concerned. The federal government has run in the red every year since 1969. The last time the US ran back-to-back surpluses, Harry S. Truman was president.

The real explosion in the deficit, however, came during the 1980s. From the time the Republic was founded until 1980, the nation accumulated about $1 trillion in debt, according to Treasury Department tables. From 1980 to 1992, the debt rose to $4 trillion.

The see-saw nature of the '80s economy played a role in this flow of red ink, say economists. So did tax cuts and defense spending increases proposed by President Reagan and passed by Congress.

But the deficit turned a corner in 1993, and has been falling ever since. Last year it was $164 billion. And through the first five months of fiscal '96, according to the latest Treasury figures, it's running about $15 billion smaller than it did in '95. The Congressional Budget Office, among others, had predicted more red ink than that for this fiscal time frame.

The Treasury now forsees a total '96 deficit of about $145 billion. That's still a lot of money, of course, but it's relatively small when measured against the size of the US economy. It comes out as 1.9 percent of gross domestic product - the lowest such figure in 17 years.

So who, or what, gets the credit for this short-term decline? The answer to that question could be politically consequential. In general, most experts give credit to two major deficit-fighting factors: a robust economy and budget and tax changes pushed through Congress by the Clinton administration in 1993. But they differ over which of these factors is more important.

THE White House, for its part, is happy to crow about itself. "The president's economic program was far and away the most important" deficit-fighting weapon of recent years, says an analysis released this month with Clinton's proposed 1997 budget.

Budget cuts and revenue increases enacted in 1993 reduced the deficits of '94 and '95 by a total of $130 billion, figures the White House. By 1998, government deficits will be $505 billion less than they would have been otherwise, according to this analysis.

Such "programmatic" changes were indeed a big part of the deficit fighting mix, said Fed chairman Greenspan last week. But other economists say the strong economy of the early '90s has had much more effect on the government's fiscal situation than Clinton's efforts.

The unemployment rate, for instance, has fallen 2 percent since the end of the 1991 recession, points out Bradley Schiller, an economics professor at American University in Washington. With more people working, the government collects more in taxes and pays out less in unemployment benefits than it otherwise would have.

"That alone accounts for a $61 billion reduction in the deficit," Mr. Schiller says. "The economy completely overwhelms what Clinton has done - or the GOP Congress, for that matter."

In any case, most economists worry more about the deficits we may run in the future, as opposed to the deficits we're running now.

Deficits are expected to shoot up again around 2010 if policy doesn't change soon.

That's partly because Social Security and Medicare spending are predicted to rise sharply after the turn of the century, as the baby boom begins retiring in large numbers.

Even the seven-year budget-balancing plans now on the table in Washington might not solve this problem, economists say. That means budget balancing will likely be a hot political topic for years, if not decades, to come.

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