Economic Boom Busts the US Deficit

Surge in tax receipts may help politicians reach budget deal - lower interest rates to follow?

If it was a movie, it would be called "The Incredible Shrinking Deficit."

A booming economy keeps pumping out more wages, profits, and capital gains, and Uncle Sam is snatching his share in the form of more taxes.

As a result, the federal budget deficit could fall to between $60 billion and $65 billion this fiscal year - half of White House projections in February.

The vanishing act could bring better times for borrowers, investors, and even politicians struggling to balance the budget by 2002:

* Interest rates should be lower than otherwise, holding down the cost of auto, mortgage, home-equity, and credit-card loans.

* Budget negotiators for the White House and the Republican-led Congress should have an easier task in agreeing on a plan for budget balance by 2002.

"The deal is there for the making," says Stanley Collender, a budget expert at Smith Barney, a New York brokerage house. "Numerically it is essentially done."

* If a deal is struck, it could lift stock and bond prices.

"The markets will jump all over it," predicts Mickey Levy, chief economist of NationsBanc Capital Markets Inc., New York.

* Temporarily, the government can repay about $65 billion of outstanding debt. Revenues will exceed expenditures briefly.

* The "bankruptcy" dates for Medicare and the Social Security system should be pushed later by a year or so.

* The nation's savings rate will get a boost.

This should make it easier for business to finance more investment, says Richard Rippe, chief economist at Prudential Securities in New York. That extra investment should create "a more prosperous economy."

The deficit estimate of $60 billion to $65 billion comes from Fred Ross, a consultant to the Washington Research Group. His forecasts in the past few years have been far better than those of the White House's Office of Management and Budget or of the Congressional Budget Office.

The economy posted its highest growth rate in a decade, charting 5.6 percent annualized growth in the first quarter.

More growth for the economy means more income for business and individuals, and that means higher tax revenues, including payroll taxes for Social Security and Medicare. Revenues now look set to exceed even Mr. Ross's forecasts for the first half of fiscal year 1997, which ends Sept. 30.

That should take some of the pressure off the White House and Congress, at odds over how to balance the budget.

ANALYSTS differ on whether President Clinton and Republican leaders, despite the good news on the deficit, can reach a budget deal.

"I'm pretty pessimistic," says Cynthia Latta, an economist at DRI/McGraw-Hill in Lexington, Mass. "We will be lucky to get a 1998 budget on time."

Mr. Collender sees a "terrific" chance for success. Ross puts the odds at 50-50.

They all agree on areas where compromises must be reached to balance the budget by 2002.

Health care. Clinton proposes $105 billion in Medicare savings over five years from health-care providers. Republicans suggest $125 billion. The numbers are close on Medicaid savings also.

With Medicare costs growing 9 percent a year, Washington "can't avoid biting the bullet at some point," Ross says.

Tax cuts. the Republicans want at least $140 billion; the White House proposes no more than $90 billion to $100 billion.

Clinton must decide whether to accept a capital-gains tax cut, sought by Republicans, perhaps in return for his education and environmental spending proposals.

Inflation index. The possibility of adopting a lower consumer price index, which would reduce annual adjustments in Social Security payments and tax brackets is still up in the air, despite both sides expressing their disinterest.

If the negotiators don't reach a deal, the Republicans will have to cobble together their own budget, which Clinton would sign or veto.