Pocketbooks, Politics Favor Budget

Battle Ahead in Congress

Millions of Americans will find something extra in their pocketbooks from the historic budget deal reached by President Clinton and the Republican leadership.

Those selling a home or shares in a mutual fund could pay less capital gains tax on the profits - assuming Congress ratifies the package.

Farmers and owners of small business can leave property to their children with less chance of Uncle Sam taking a large chunk. The amount exempted from estate taxes will double to $1.2 million in phases.

Parents contemplating huge bills for children planning on college will pocket not only a tax break but perhaps a scholarship.

Up to 5 million children of the poor will qualify for free health insurance.

Legal immigrants will not lose federal welfare and disability benefits. The last Congress had eliminated these benefits.

But the deal won't be without cost for those of you who pay certain taxes.

Seniors will pay $1 a month extra for Medicare. But much of the savings will come from physicians, hospitals, and others in the medical community. Their incomes will decrease to produce the bulk of a $115 billion savings over five years.

Incomes will also shrink for corporations in the defense industry. The new budget includes some $85 billion in unspecified cuts over five years.

A tax on air-travel tickets will be renewed, costing a bundle for business and leisure travelers.

The deal does not include any legislated change in the consumer price index. So the indexation of Social Security payments and of income taxes will not be altered.

The budget proposal's plan to eliminate the deficit could also trim some debt payments for consumers in the form of lower interest rates.

In the past, Federal Reserve policymakers have looked favorably on government efforts to trim the budget and curtail spending. They have seen some leeway for easing off on interest rates.

But while individuals may find some gain, the economy probably won't see much change.

Balancing the federal budget portends little impact. A slightly tighter fiscal policy won't send the economy into recession, economists say. Nor create a boom.

The federal deficit this year of about $70 billion or less is only 1 percent of a $7 trillion economy.

"Balancing the budget is largely a symbolic political act," says former Labor Secretary Robert Reich. "It doesn't have a great deal of economic significance relative to where we are today economically."

Interest rates might actually rise over the short term. Today's economy is zipping along so nicely that many economists expect the Fed to actually boost rates another quarter of a percentage point at a policy session May 20. Fed officials have signalled a desire to preempt any return of inflation.

During the first quarter of this year, gross domestic product - the output of goods and services in the nation - grew at a 5.6 percent annual rate, the best performance in nine years.

In the spring quarter, growth will slow to a 3.5 percent annual rate, predicts Stephen Roach, chief economist of Morgan Stanley Inc. That, he argues, justifies a further boost in interest rates.

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