World's Voters Belt the Tighteners

ANALYSIS

In many nations, the appetite for governmental austerity has shrunk.

Voters in two recent bellwether elections, in France and Britain, signaled a dampened enthusiasm for spending cuts aimed at reducing bloated deficits.

In the United States and Canada, booming economies have unexpectedly swelled government tax revenues, diminishing the need for deficit cuts.

While voters may state a need for government to balance its books, many are now recoiling at the reality of snipping back social programs and entitlements. Politicians are "flinching all over the world," says Stephen Roach, chief economist of Morgan Stanley Dean Witter in New York.

"You can't run on a platform of only cutting the budget," adds A. Steven Englander, a Paris-based economist with Smith Barney Inc., an investment firm.

North American surpluses

Canada could actually have a small federal-government surplus next year. The newly reelected Liberal government will have the more politically pleasant task of deciding whether to use that surplus to reduce debt, cut taxes, or enlarge spending on programs.

With the success of the Liberal government in moving from a huge $43 billion deficit in 1993 (in an economy 1/10th the size of that of the US) to the prospect of growing surpluses, "the need to implement further spending cuts isn't there," says Richard Egelton, a Bank of Montreal economist.

In the US, President Clinton and the Republican-led budget committees of Congress last month outlined a deal to balance the budget by 2002. This plan was facilitated by the unusually strong US economy and a 1993 tax hike that produced as much as $88 billion in extra revenues.

But the US government is not balancing the budget by resetting its priorities, says Roger Brinner, chief economist at DRI/McGraw-Hill, a Lexington, Mass., consulting firm. Federal spending, he estimates, will increase by about 3.6 percent more than his firm anticipated last year.

Congressional negotiators are taking advantage of the extra revenues to cut less and spend more. Indeed, the accord for a balanced budget in 2002 projects an increase in the deficit in fiscal 1998.

Nonetheless, if budget surpluses in the states and cities are weighed against the diminishing federal deficit, government as a whole in the US is running a small surplus at the moment.

A French correction

In France, voters gave President Jacques Chirac and his efforts to slash the country's budget deficit a stinging rebuke, as Socialists gained ground.

"It was a vote against additional belt-tightening," says Morris Goldstein, an economist with the Institute for International Economics in Washington.

At an Amsterdam summit of European Union leaders June 16 and 17, the new Socialist prime minister of France, Lionel Jospin, is expected to press for more flexibility in the criteria that must be met for joining a common currency.

The 1992 Maastricht Treaty aims at creating a common currency, the euro. As one precondition for entry into this European Economic and Monetary Union (EMU), each nation was to shrink its budget deficit to 3 percent or less of gross domestic product, its total output of goods and services.

That has proved extremely difficult politically. But if terms of EMU entry now are lowered to accommodate France, then Italy, Spain, and Portugal might also qualify for the EMU.

In any case, pressures for fiscal austerity across Europe will be diminished.

A German boost

The German government's ability to insist on tough EMU conditions has been weakened by its plan to use an accounting gimmick to reach the Maastricht fiscal requirement.

It intended to revalue its gold reserves, giving its budget a one-time boost in fiscal 1997. But when the Bundesbank, Germany's powerful and independent central bank, opposed the plan, Finance Minister Theo Waigel was forced last week to back down.

With the governing coalition split on how to solve the crisis, a leading opposition figure has repeated his call for a delay in introducing EMU. This, argues Gerhard Schroeder, a leading Social Democrat, would give Germany more time to meet the strict fiscal criteria.

'Tinkering' in Britain

In Britain, new Prime Minister Tony Blair took the Labour Party to the center and won last month's election on the promise of change. He vowed not to bust the Conservative government's spending limits for two years.

Nonetheless, observers expect some fiscal shuffles - a windfall tax on privatized industries and perhaps a reduction in home mortgage relief to help finance a jobs program for youths and a cut in the sales tax on fuel.

There will be "more tinkering," says Nariman Behravesh, DRI's international economist. The new budget will tell just how much.

Morgan Stanley's Mr. Roach sees the ousting of many conservative governments in the industrial nations in the 1990s as reflecting the impact of the globalization of business, outsourcing of jobs, and competition from billions of low-wage, third-world workers in an increasingly open world market.

"Employers have most of the power in the new labor-market equation," he says. "The only option left to workers is the political one - voting against the policies of austerity."

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