Strong U.S. Economy May Erase Deficit

As President Clinton and Congress gear up this week for final negotiations to close a balanced budget deal, some fiscal experts are warning that the strong U.S. economy threatens to erase the deficit before Washington can claim credit for eliminating it.

In what could prove a public relations nightmare for Democrats and Republicans eager to boast about bringing spending and revenue into line for the first time since 1969, the economy’s sustained vigor has generated an unexpected surge in tax receipts that could wipe out the deficit as early as next year--without any change in federal policies.

Administration and congressional officials said Tuesday that a jump in taxes flowing into the Treasury in June suggests that, in the fiscal year ending Sept. 30, the deficit--the annual difference between what the federal government spends and what it collects in revenue--might fall to as low as $45 billion.

That figure would have only a slight impact in slowing growth of the national debt--the federal government’s cumulative borrowings--which over the years has swollen to more than $5.4 trillion.

But it would be a sharp drop from the $67-billion deficit Clinton and Congress had predicted for fiscal 1997 in their May 2 budget agreement, and about a third the size of the $126-billion deficit the administration had forecast in February. It would also be less than a fifth of the deficit’s $290-billion peak in 1992.

Just two months ago, Clinton and the GOP leaders were congratulating themselves for reaching what they billed as a historic agreement on the outlines of a tax and spending plan that would result in balance by 2002. But many economists now say that goal is already within shouting distance--and probably could be attained much faster if the politicians would only keep on bickering, thereby precluding the passage of tax and spending proposals that are expected to push up the annual deficits over the next several years.

“I’m predicting a balanced budget by next year, but only if there’s no budget deal,” said Kurt Karl, chief economist at WEFA Group, an Eddystone, Pa.-based forecasting concern. “One more year of gridlock and we’re home.”

Balance by the next fiscal year is “not impossible at all” if there is no budget deal, said Bill Dudley, chief economist at Wall Street investment bank Goldman Sachs & Co. With incomes rising because of the healthy economy and more investors paying taxes on their gains from the sale of soaring stocks, Treasury revenue is likely to continue rising, Dudley said. “That could bring us pretty darn close.”

Budget negotiators at both ends of Pennsylvania Avenue have come to view the Treasury’s windfall as a mixed blessing. The extra revenue means balance can be achieved with fewer painful spending reductions and more popular tax cuts. But negotiators worry that the recent flurry of good news could breed complacency just as the two-year struggle over tax and spending priorities has reached its most delicate phase.

One sign of that concern: GOP leaders in Congress have urged the administration to postpone the release of a regular midyear report by the White House Office of Management and Budget. “We would probably prefer to complete this work under the current estimates and get it done,” House Majority Leader Dick Armey (R-Texas) said Tuesday.

The White House seems happy to oblige. “It may not make sense for the administration to allocate resources from OMB and Treasury to complete a report that we believe could be out of date within three weeks,” said OMB spokesman Lawrence J. Haas.

Many economists dispute the notion that Washington can coast to budget balance without further legislative effort.

“The business cycle hasn’t been repealed,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis, who predicts annual budget deficits “in the $75-billion range” throughout the rest of the century in the absence of policy changes. He warned that the added complication of a recession could send deficits shooting back up to $150 billion.

Congressional and administration officials argued Tuesday that bipartisan cooperation on budget issues had contributed heavily to recent improvement in the deficit outlook by convincing financial markets that American policymakers share a commitment to responsible fiscal policies.