The Dipping Deficit

President Clinton will get more good news today. The budget deficit for the federal government is expected to come in at about $109 billion, even lower than the $116 billion previously projected. That's the smallest deficit since 1981. Measured as a share of national output, the shortfall for the fiscal year that ended Sept. 30 will represent the smallest deficit since 1979, 1.6 percent.

Undoubtedly, Mr. Clinton will claim credit for this deficit reduction. In a preemptive move, Republicans have already declared that the president has nothing to do with this progress.

We are somewhat more generous than that. We reckon that the 1993 tax hikes, pushed through Congress by Clinton, raised sizable revenues, mostly by taxing the income of the well-to-do at a higher rate.

Further, the shrinking deficit has meant that Uncle Sam has had to borrow less, reducing the demand for money in the capital markets. This probably reduced interest rates a little from where they would otherwise be. At this point, if interest on the debt is excluded, the budget moved into the black in 1994 and is now more than $100 billion in surplus.

Nonetheless, the influence of any president on the economy is limited. Much more important is the Federal Reserve with its control of the nation's money supply and its influence on interest rates. Here again, Clinton has been helped. Despite strong pressures from the bond market in recent months, the Fed decided last month not to raise short-term interest rates. Wall Street feared that the economy was moving at an inflationary pace. But the latest statistics, on housing and output in the nation's factories, mines, and utilities, indicate the economy is slowing already. So the Fed's decision was a good one.

Certainly the nonaction was cheered by the business community. Nearly 90 percent of the chief executives at a meeting of the Business Council in Williamsburg, Va., last week indicated the Fed should keep monetary policy as is.

From a purely economic standpoint, the deficit has lost most of its importance. The reduction in its size means less competition for the savings of individuals or businesses. The domestic savings rate (personal, business, and government) has begun to increase again after more than two decades of decline.

From a political standpoint, however, the deficit still has some importance. It makes many voters suspicious of Republican candidate Bob Dole's call for a $550 billion tax cut over six years. Some prefer deficit reduction to a tax cut. Whichever candidate is victor in November, he will face the need to trim the rise in Medicare costs and, less urgently, Social Security costs.

Economists' projections show the deficit rising again modestly this fiscal year to about $114 billion, and $124 billion the year after. Appointment of a nonpartisan commission would be one route to avoiding the political blame problem for any cuts in entitlement programs. But even naming its members will not be easy, since most experts have a known position on these issues.

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