Federal Budget Deficit Does Cheshire Cat Act

The federal budget deficit is diminishing - fast.

"We've made serious progress," says Stanley Collender, a budget expert in Washington. "It is hard to see the deficit as a big issue in the presidential campaign. What is [Bob] Dole going to bring up? What is [Ross] Perot going to bring up?"

His comment followed a mid-session review of the budget Tuesday by President Clinton's budget office, putting the 1996 deficit at $117 billion, for the fiscal year that ends Sept. 30. That's $29 billion lower than the administration's last estimate, $47 billion lower than the actual 1995 deficit, and "far less" than the $290 billion deficit of 1992 - "the year before the president took office," notes the budget office fact sheet.

"This is a victory not only for the president and those who work for him, but more importantly for the American people," crowed White House chief of staff Leon Panetta.

That sparked a quick response from the Republicans. "The administration taking credit for it is like the rooster taking credit for the sunrise," said Senate Budget Committee chairman Pete Domenici of New Mexico.

Mr. Collender of Price Waterhouse, an accounting and consulting firm, is more generous to Mr. Clinton. "It [the shrinking deficit] happened on his watch. He deserves 75 to 80 percent of the credit," he says. One major factor in deficit reduction was the 1993 tax bill, which raised the tax rate for high-income individuals, extended and increased the motor-fuels tax, repealed the wage cap on the hospital-insurance tax, increased the taxable portion of Social Security benefits, and boosted corporate taxes.

Clinton "committed substantial political resources to the fight," Collender says.

A report by the Senate Budget Committee's Republican staff states that "Republican determination saved President Clinton from his spendthrift ways and kept us on the path of fiscal integrity." But the report does credit the 1993 tax hikes with raising a cumulative $121 billion in revenue. That is part of a $407 billion cumulative reduction in the deficit from levels projected in 1993 by the Congressional Budget Office over the four years of the Clinton administration.

Budget experts list other factors behind the deficit shrinkage:

Economic growth. Economists Richard Rippe and Rita Lavin at Prudential Securities in New York, say the peppy economy lowered the deficit about $60 billion, by boosting tax revenue and reducing unemployment-insurance payments. The Republican staff report says the economy accounted for a $51 billion decline.

Thrift rescue. As the government switched from doling money out to help the depositors of thrift institutions to selling thrift assets, there was a favorable budget swing. It amounted to $80 billion, reckons the Prudential study.

A recent Supreme Court decision regarding savings and loan associations could reverse that pattern again, costing the federal government $10 billion between 1997 and 2002.

Spending reductions. The Republican staff puts spending savings at $26 billion, of which $19 billion should be credited to cuts Republicans made in the 1996 appropriations process.

Stock market boom. Investors have enjoyed huge capital gains in stocks, directly or indirectly through mutual-fund shares. When these gains are realized by sale of assets, the investor must pay capital gains and this has pushed up tax revenues.

From a purely economic standpoint, the deficit has lost importance. "It is not anything we should be alarmed about," says Cynthia Latta, an economist with DRI/McGraw-Hill, a Lexington, Mass., economic consulting firm. This year's fiscal deficit is equivalent to 1.6 percent of gross domestic product, the nation's output of goods and services. That's the smallest share since 1974.

But there is concern that the deficit will grow again. On paper, both the Republican and the Clinton budgets promise to balance the budget by just after the turn of the century. The new White House budget estimates see a $26 billion surplus in 2001.

But Ms. Latta and Mr. Rippe hold that the White House and Congress will have to trim growth in entitlement spending, particularly Medicare and Medicaid, for that to happen.

If successful, Rippe sees several economic blessings: More savings channeled into productive investments, a lower international-payments deficit, a boost in bond prices, a drop in federal interest payments, and greater financial stability.