Deficit Will Be Lowest In Almost A Quarter Century Prospects Add More Optimism To Future Expectations From National Economy
The U.S. Treasury, whose coffers have been filled by the strong economy, will soon report that the government’s budget deficit for the just-concluded fiscal year was the smallest in almost a quarter century - one reason the economy might stay healthy for a while.
The budget deficit for the fiscal year ended Sept. 30 will probably total $26.1 billion, based on bank, brokerage and economics firms forecasts tracked by Bloomberg News. That would beat last year’s $107.3 billion deficit and be the narrowest budget gap since fiscal year 1974, when the deficit was just $6.1 billion.
And it would be good news for borrowers. “Interest rates come down” as the Treasury borrows less, said David Jones, chief economist at Aubrey G. Lanston & Co.
“We’ve seen an investment boom” in technology and other industries as capital has shifted to private enterprise from covering government shortfalls, Jones said. That helps the economy “avoid the boom and bust cycle,” he said.
Federal Reserve Chairman Alan Greenspan, who has long preached the benefits of eliminating the budget deficit, repeated those views to Congress earlier this year. “If we go lower, it means much greater capital investment, much more intensive use of our resources, much lower mortgage interest rates for home ownership,” Greenspan said in March. “There are a whole lot of positives that spill out … increased growth, increased productivity, and lower inflation.”
The deficit has declined in each of the last four years —falling to about a tenth of the record shortfall of $290 billion posted just five years ago. Thanks to the budget agreement enacted into law by Congress and President Bill Clinton in August, the deficit is poised to move from red ink to black for the first time in about 33 years.
“We’ve eliminated almost 90 percent of the budget deficit,” said David Wyss, an economist at DRI/McGraw-Hill in Lexington, Massachusetts. Moreover, the deficit this year accounts for 0.4 percent of the gross domestic product, the lowest reading since the last surplus and the smallest portion of any of the major industrial countries, Wyss said, adding: “We’ve been lucky.”
A recent forecast by the Congressional Budget Office is even rosier, projecting a shortfall of $23 billion for the fiscal year just ended and a surplus of $32 billion by 2002. The last annual surplus, about $3 billion, was set in fiscal 1969.
The latest statistics could be released as early as Wednesday, according to government officials. Because of the political significance of the falling deficit and judging by past years, the actual announcement may come directly from Clinton at the White House before the Treasury’s formal budget statement is released with all the nitty-gritty details.
Larger-than-expected tax collections have been perhaps the chief reason for the deficit’s falling to such as low level. As recently as February, the Clinton administration was expecting a fiscal 1997 deficit about $100 billion larger.
Those higher tax revenues have come from the vibrant economy, higher taxes on the affluent, low unemployment, hefty corporate profits, gains in the stock market and the gradual shifting of people from welfare rolls and into the nation’s workforce.
In addition, efforts to balance the budget and reduce government spending which led to lower interest rates along with the military’s stand down since the collapse of the Soviet Union, have also helped reduce the red ink.
For the first 11 months of the current fiscal year, the budget deficit totaled $71.3 billion. Add in the $45.2 billion dollar surplus that analysts expect was recorded for September - and the deficit for the full 12 months would total $26.1 billion.
The Treasury typically reports a deficit most months because it spends more money than it receives, and borrows the rest. Monthly surpluses usually come in January, April, June and September, which coincide with quarterly tax payments. Individual income tax returns are also due in April.
A shrinking budget deficit, among other things, helps keep interest rates down, because the Treasury doesn’t have to borrow as much money to pay its debts. In the current quarter, the Treasury estimates its net borrowing will total just $10 billion. Moreover, in the April-June quarter, the Treasury retired a record $71.5 billion in debt.
To be sure, the Treasury has a long way to go to pay off more than $5.4 trillion in debt as it shakes off the legacy of the 1980s. Still, falling rates reduces the cost of government borrowing to finance that debt. And that helps keep the deficit from growing.
Additionally, the lowest inflation rate in more than a decade, as measured by the Labor Department’s consumer price index, is keeping government cost-of-living-payments to Social Security beneficiaries and others from ballooning as in the 1980s.