Federal Deficit Fading Into Economic Sunset

What was almost unbelievable a few years ago has happened: Government in the United States is running in the black.

The federal government deficit shrank to $22.6 billion in the just-ended fiscal year 1997. But a surplus in local and state governments close to or exceeding $30 billion has meant that government as a whole enjoys a budget surplus in the nation.

Moreover, several fiscal analysts expect Washington to rack up a surplus in the fiscal year that started this month.

It will be $20 billion to $40 billion, says Fred Ross, an economist who has been far more accurate in recent years than government budget experts. No other industrial nation in the world can boast of such a healthy budget picture.

While the shrinking budget won't bring about immediate changes in the lifestyle of most Americans, car loans, home mortgages and other loans are probably cheaper today than they would otherwise be, say economists. Consumers face less competition for loan money because the federal government borrowings in money markets have declined rapidly.

But the biggest impact of the disappearing deficit may be political. The prospect of a surplus opens up opportunities for tax cuts and new spending measures. President Clinton was quick to take credit for the drop in a speech at the Democratic Leadership Council in Washington yesterday.

"Voters should maybe be encouraged that politicians did do something about the budget deficit," says Barry Bosworth, an economist at the Brookings Institution, a Washington think tank. The budget packages of 1990 under President Bush and 1993 under President Clinton did restrain federal spending and did raise federal revenues.

Those measures, combined with a bustling economy and a booming stock market, shrank the deficit far faster than government budget officials had predicted. In early February, the Clinton administration forecast the deficit at $126 billion.

As a result of these combined developments, the federal government itself has shrunk. It consumes about 20 percent of all goods and services produced in the nation, down from 22.5 percent in 1991 in the midst of a recession.

Contrariwise, federal revenues have risen from around 17 to 18 percent of gross domestic product several years back to 20 percent now. "Tax revenues are at historically high levels," summarizes Mr. Ross, speaking of post-World War II years. "[Government] spending is at historically low levels."

A large chunk of the extra revenues is being taken from the affluent. In recent years, the well-to-do have been getting richer while those with modest incomes have seen little or no gains.

Since the 1993 package raised the maximum income tax rate for those with high incomes to 39.6 percent from 31 percent, the rich have involuntarily been sharing their prosperity with those less well-off through Washington.

Since stocks are still primarily held by those in upper-income brackets, these investors have also likely been paying more in the way of capital-gains taxes. Before the recent stock market fall, prices were up 45 percent in the previous 12 months.

Overall, fiscal 1997 revenues were up nearly 9 percent and spending rose only about 2.5 percent.

Other factors contributing to the improving federal budget picture include:

* Commercial banks and thrifts have been prospering. Thus the Bank Insurance Fund is running a healthy surplus.

* Medicare and welfare spending has come down more rapidly than anticipated. Medicare, once growing at nearly a double-digit annual rate, is now increasing not much faster than the economy as a whole.

* Discretionary spending, the outlays on roads, defense, parks, etc., that Congress controls, has been frozen at about $550 billion since 1990.

In the months ahead, Washington will be faced with a new, more pleasant problem: What to do with a small surplus?