Slipping Economy May Eat '99 Budget Surplus

The United States has just racked up a historic achievement - a major surplus in the federal budget this year.

But can it survive next year?

It was $70 billion in fiscal 1998, which ended Sept. 30, just about the same as the $71 billion forecast a few weeks ago, the White House announced last Thursday.

"Great!" some economists say. This gives the nation another powerful tool - what they call "fiscal stimulus" - to combat a recession, should the Asian/Russian financial crisis depress output further.

So far, Washington policymakers are counting on the Federal Reserve and its chairman, Alan Greenspan, to keep the country's economy humming along with lower interest rates.

Builders, manufacturers, and consumers, they hope, will invest and spend more if borrowing costs are low and money is handy.

Most of the budget surplus is being kept to "rescue Social Security," as President Clinton insists. Republicans have gone along.

But the tune in Washington could quickly change if the economy does enter a slump next year, as a few economists predict.

Tax cuts and extra spending will become hot topics.

"Democrats and Republicans will try to outdo each other to use fiscal policy to stimulate the economy," says Bill Sharp, an economist with Chase Securities Inc., a New York investment firm.

Europe has already made the switch "from Scrooge to Keynes," says J. Paul Horne, an economist in London for New York-based Salomon Smith Barney.

John Maynard Keynes was the famous British economist who advocated of government spending to revive economies in the Depression.

By the late 1960s, such fiscal policy was widely accepted as a standard tool.

Out of favor in Europe since 1993 because of preparations for monetary union, it is reemerging there.

European unemployment hovers near 11 percent, more than double that in the US, and Mr. Horne sees a "historic turning point" in Europe's policy consensus.

Politicians are leaning toward more active government measures to create jobs.

The political pendulum has swung from center-right to somewhat left-of-center governments in 13 of the 15 European Union (EU) countries.

In the latest shift, Helmut Kohl's conservative government in Germany lost to a "Red-Green" coalition under Gerhard Schrder.

Unlike Americans, the man-on-the-street in Europe doesn't care about a budget surplus, says Horne. The "No. 1 priority" is jobs.

That means big public-works programs will blossom in the next year or so. France and Italy are imposing 35-hour work-weeks, plus limitations on overtime, in the hope of forcing businesses to hire more workers.

Horne worries that such measures will not raise productivity or create "real" jobs.

Japan, too, is moving toward greater fiscal stimulus. The Japanese government pledged last week to produce a further emergency package worth at least $84.7 billion next month to boost the country's ailing economy. It will include public works, tax cuts, and measures to boost housing in urban areas.

Those measures are planned despite a budget deficit already equal to 8 percent of Japan's gross domestic product (GDP), its output of goods and services. Economists use that measure as an indication of a deficit's impact on the economy.

In the US, a budget surplus "suggests there is some room to push the economy forward through fiscal policy," notes Edward McKelvey, an economist with Goldman Sachs & Co., investments bankers in New York.

But both he and Mr. Sharp of Chase Securities suspect the surplus could shrink as corporate profits weaken and capital gains diminish with the struggles in the stock market.

Uncle Sam has been taking his chunk of those profits. As a result, the fiscal 1998 surplus was the largest in dollar terms in history, the first since 1969, and the largest surplus as a percentage of GDP - 0.8 percent - since 1956.

The peak deficit of $290.4 billion occurred in fiscal 1992. That was 4.7 percent of GDP.

Chase Securities is forecasting a surplus of only $50 billion in the current 1999 fiscal year.

Mr. McKelvey suspects that if the economy does slide into recession, a Republican-controlled Congress will fight it by voting for major tax cuts. And despite Social Security's plight, Mr. Clinton will not veto them.