Federal Budget Deficit Reduced, But Why? Clinton’s Advisers Admit The Treasury Is Awash In Unexpected Revenues, Perhaps From Capital Gains Taxes

By almost any statistical measure, the reduction in the federal budget deficit, hailed by President Clinton on Monday, is impressive: it has dropped to its lowest level in 15 years, so low that the United States now has the smallest deficit - as a percentage of its economy - of any of the world’s largest industrialized nations.

But even Clinton’s advisers, who have been massaging every figure these days into a campaign sound bite, acknowledge that part of the reason that the deficit narrowed so quickly is that the treasury is awash in unexpected revenue, roughly $27 billion. That is the good news. The bad news is that no one is exactly sure why.

“It’s a mystery,” Treasury Secretary Robert Rubin said Monday. “We have theories, but no one has quite figured it out.”

The most popular of those theories is that investors, convinced that they have ridden the stock market surge as far as they dare, are beginning to reap their profits, which funnels capital gains tax revenue to the government.

Others note that most of the increased revenue seems to be coming from individual tax returns, rather than corporate returns, and speculate that the swelling of the employment rolls is turning non-taxpaying households into taxpayers.

But what everyone agrees on is this: the revenue surge is not likely to last very long.

“There are definitely question marks out there,” Gene Sperling, one of Clinton’s domestic economic advisers, said Monday. “You can’t build into your expectations that every year is going to look as good as 1996.” He also cited some unexpected savings, particularly for health care, but warned, “You can’t assume that one-year reductions are going to go on forever.”

For example, the growth in Medicaid spending has slowed dramatically, to about 3 percent from 10 percent a year, in large part because of a shift toward managed-care plans.

The annual deficit reached a record of $290 billion in President George Bush’s last full year in office. It has declined every year since, and by the end of the fiscal year that ended on Sept. 30, it dropped to $107.3 billion. That is a drop of $183 billion, or 63 percent.

Naturally, both parties took credit Monday for the size and speed of the decline. Haley Barbour, the chairman of the Republican National Committee, said the chief reason was the “common sense Republican Congress,” which took over in January 1995. But that explanation overlooks the first two years of declines.

Rubin had a different view. “We started on this on Jan. 7, 1993,” when Clinton’s transition team first set the course, he said Monday. He estimated that roughly $40 billion of the decline arose from “technical factors,” including the unexpected drop in the growth of health-care spending.

The truth is that the good news about the deficit could create some future stumbling blocks for both Democrats and Republicans. Clinton’s plan to balance the budget by the year 2002 includes about $50 billion in revenue gains over the next six years, which means that the White House assumes that roughly $8 billion of the $27 billion gain will continue. If these assumptions are wrong, the budget would be out of balance.

Dole’s economic plan assumes that roughly $80 billion of the increased revenue will keep rolling in over the next six years - even though the plan calls for a major cut in capital gains taxes, the likely cause of the revenue surge.