Let’s Postpone the Spree
A robust economy helped slash the federal budget deficit to a barely visible $22.6 billion in the fiscal year that ended Sept. 30, and many in Washington are starting to smack their lips over the prospect that before long there will be a budget that’s not just in balance but delivers a surplus. A surplus after decades of deficit financing is an enormously appealing symbol. More than that, it raises for politicians the alluring possibility of spending this newfound money on any number of worthy causes: tax cuts, reducing the national debt or restoring funding to programs hard-hit by recent cutbacks, to cite the most obvious examples. Our advice is to resist that temptation. Chances are that any surplus that turns up in the next few years won’t stay around very long.
There’s no question that five straight years of reduced federal deficits, which has meant less federal borrowing, helped keep interest and inflation rates down. That in turn has fueled economic expansion and job growth, boosting tax revenues. Also contributing powerfully was the remarkable ascent of the stock market, which has provided investors with significant gains and the Treasury with windfall capital gains taxes. But even before the jolts to the market of recent days, warnings were being raised about how long this could last.
Certainly it appears that interest and inflation rates will stay under control for at least the next few years. But, as today’s Page 1 headlines remind us, the stock market can’t be counted on to produce an ever-swelling stream of taxable profits. Even when the market steadies, the cut in the capital gains tax rate enacted this year will slice revenues from that source. Other pending tax cuts could similarly lead to budgetary red ink in coming years.
At the same time larger tax revenues from higher private-sector profits are not a sure thing. A global economy burdened with overcapacity in many basic areas casts a long and somber shadow. How all this will affect U.S. employment and growth in the years ahead is an open question.
But none of this diminishes the achievement of bringing the 1997 fiscal year deficit down to about one-fifth of what it was just a year earlier. Equal to a scant 0.3% of the nation’s economic output, the deficit hardly registers against a gross domestic product heading toward $8 trillion. If there indeed is a budget surplus next year or the following year, that too should be celebrated. Especially since it could be a while before another one comes along.
