Federal Budget Deficit Coming In Well Under Target

OFFICIAL Washington has suddenly awakened to a development that has been obvious to Wall Street for some time: The Treasury deficit this year will be far less than the $318 billion the White House predicted in January. Indeed, in the 12 months ended March, the government's red ink totaled a trifling $221 billion. Allied contributions to support Operation Desert Storm flooded in at an annual rate of $91 billion in the first quarter this year, up from only $17 billion during the final three months of 1990. At the same time, the federal bailout of savings and loan depositors has been running behind schedule because of delays in passing necessary appropriations as well as the usual bureaucratic snafus.

These gains are clearly temporary. To a large extent, they will just push the deficit forward from 1991 to 1992. Moreover, $220 billion (or whatever larger number happens to suit your fancy) is still a lot of money.

Even so, the tide of red ink is less threatening to the economy and financial markets than analysts assume. At present, most US borrowing is recycled in the capital markets. For example, payments to depositors in failed banks and savings and loans - plus much of the interest on the national debt - are simply reinvested in other obligations. What Uncle Sam is dishing out with one hand he is getting back with the other.

In fact, the basic federal budget - revenues less outlays for goods, services, and transfers other than interest - was in balance this winter. Even if that were not true later on, the basic deficit would be modest. This means that federal borrowing is unlikely to drive interest rates much above present levels - even after the recession ends this summer. That will be good news for homebuyers, business people trying to upgrade or expand their facilities, or indeed anyone who has to borrow money.

There are other reasons why the budget outlook has improved. Most important, the control procedures which the White House and Congress hammered out last fall have been more effective than their authors assumed. If White House officials had not been so cynical about the deal they struck, their budget forecast would not have missed so badly.

Rudolph Penner of the Urban Institute (a former head of the Congressional Budget Office) says that "the new budget process is working very well. There have been fewer violations of it than I expected."

Mr. Penner cited five things that Congress did not do to support his optimism. (1) Members did not suspend the rules because of the recession. (2) They did not add special antirecession spending programs. (3) They pared back programs to support veterans of the Gulf war "to the point where they could be financed within the rules of the budget agreement." (4) They defeated the proposal by Sen. Daniel Patrick Moynihan (D) of New York to cut Social Security payroll taxes. And (5), they did not violate the b a

sic guidelines in the resolutions that will govern the 1992 budget.

The new rules to control federal spending are admittedly complicated. While complexity is not necessarily a virtue, the new measures have clearly been much more effective than the rubbery spending ceilings under the old Gramm-Rudman-Hollings budget act.

Members of Congress now have to make genuine choices between competing demands for funding. Among other conditions, the law set two broad groups of programs: discretionary appropriations, which Congress must vote every year, and so-called direct or entitlement outlays, which are governed by more permanent laws.

The law created three classes of discretionary spending - defense, international, and domestic. It then set separate spending caps for each type. Congress will trigger an automatic sequester (mandatory cutback in spending) anytime it passes a law that will breach the outlay ceiling for a particular category.

In addition, there are "pay-as-you-go" sequesters to control both revenues and expenses of some of the major entitlement programs such as Medicaid, unemployment insurance, revenue sharing, and federal retirement benefits. Over time, if the net effect of these programs were to increase the deficit, this would trigger a sequester. Outlays would be reduced by a uniform percentage sufficient to put the budget back on target.

The new rules are far from perfect. In general, Social Security and interest on the debt remain outside the budget control process. No one will go to jail for breaking the rules. Nevertheless, the attempt was serious. And it is working.