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Federal Budget Deficit May Shrink All by Itself


Look for a significant drop in the budget deficit this year - perhaps as much as 23 percent - even if Washington takes no legislative action to reduce it.

The economy may simply do what a free market system is supposed to do: take care of itself - no thanks, or credit, to President Clinton or Congress.

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Economic growth and soaring stock prices should generate higher tax revenues and lower welfare costs, shrinking the deficit as low as $83 billion for fiscal 1997, down from the current $107 billion, projects Joel Prakken, chief economist at Macroeconomic Advisers in St. Louis.

With the stock market already up about 9 percent for the year, after a 26 percent jump last year, investors can be expected to beef up federal tax coffers through the capital-gains taxes they pay on stock profits.

Ironically, a proposed budget change now in the congressional spotlight would reduce those tax revenues by reducing the capital-gains tax rate.

The US economy this year is expected to match last year's growth of 2.5 percent, turning more welfare recipients into paycheck recipients.

Differing forecast

Not everyone shares Mr. Prakken's optimism, however. For instance, Cynthia Latta, an economist at DRI/McGraw-Hill, a Lexington, Mass. consulting firm, expects a $10 billion increase in the deficit this year to $117 billion. The Clinton administration itself puts the deficit still higher, $125.6 billion.

Through January, the deficit totals $45.96 billion, higher than the $36.29 billion in the same four months a year earlier.

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Both the White House and the Republican leadership have proposed changes to the budget process that could skew the numbers even more - cutting some taxes for political friends, raising other taxes without seeming to do so, all in a drive to balance the federal budget.

"It is really very difficult to do that," says Robert Greenstein, director of the Center on Budget and Policy Priorities (CBPP), a Washington think tank.

Both sides have proposed budgets that balance by 2002. And the Senate is now within a vote of a balanced budget amendment. A Senate vote on the balanced-budget amendment is expected next Tuesday.

But both sides also want tax cuts, which undermine budget balance.

Gains for wealthy

Mr. Greenstein's center charged yesterday that tax-cut proposals from the Senate Republicans would primarily benefit the wealthy, while costing far more than the Clinton plan. They would even cost more than the Contract With America tax cuts from the 1995 budget reconciliation bill that the president vetoed.

"The gap between wealthy Americans and the rest of the people - already the worst among major industrial nations - would become wider still," says Greenstein. The measures, he adds, also means deeper cuts in "basic programs that middle- and lower-income Americans rely on."

The two Republican bills would cut taxes on capital gains, enlarge the amount of an estate that can be passed to heirs tax-free, give middle-income and some upper-income families a tax credit of up to $500 a child, enlarge tax benefits of individual retirement accounts, and provide tax breaks for college expenses and savings.

These measures would cost $526 billion in revenues over the next 10 years, according to the Congressional Joint Committee on Taxation, the official scorekeeper on tax legislation. Some $325 billion of this total would fall in the second five years, notes Iris Lav, an economist with the non-partisan think tank.


The CBPP study finds that under the Republican proposals, 61 percent of the tax relief would go to those with middle incomes in the years to 2002. But because of "backloading," in the second five years, only 33 percent would go to such families. The remainder would go to well-to-do families.

Also, revenue losses would reach $73 billion in the 10th year and continue to grow in the following years - at a time when the retirement of baby boomers makes deficits a serious problem, says Greenstein.

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