Wall Street frowns on budget plan Bill is too heavy on taxes, won't cut deficit enough, say most analysts

August 07, 1993|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- As President Clinton's deficit-cutting bill inched its way through the Senate toward final approval last night, Wall Street's legions of economic analysts and forecasters had already given it a near-unanimous thumbs-down.

In interviews, newsletters, studies and faxes, many of the nation's top economists from business and finance expressed grave doubts about the plan to cut the deficit.

While applauding the president for tackling the problem and for basing his plan on credible economic projections, most found the plan tax-heavy and content-light.

Opposition was rooted in the plan's lack of long-term deficit reduction and the drag it was expected to place on the economy. With deficits expected to rise again in 1997 and the fragile recovery strained by the plan's new taxes, few could find much positive to say about it.

"A picture of an air-sickness bag. That's Wall Street's reaction to it," said Robert A. Brusca, chief economist at Nikko Securities Co.

Originally drawn up in February by Mr. Clinton, and rewritten since then by House and Senate negotiators, the bill passed the House by a two-vote margin on Thursday and was passed by the Senate with a one-vote majority.

The bill is supposed to cut the estimated increase in the federal debt by $496 billion over five years, with total national debt increasing by $1 trillion, to nearly $5 trillion, during that period. Annual deficits are projected to decrease to 2.7 percent of the gross domestic product, from 4.3 percent.

Some on Wall Street said the administration's projections for tax revenues were inflated, however, while others said certain provisions, such as one that squeezes Medicare payments by $55 billion, would probably never be enacted.

But most analysts said the plan was fairly credible, at least as far as Washington deficit-reduction packages go. What really irked them was that the deficits begin rising again in 1997 as entitlement programs continue their unabated growth.

"It's kind of pathetic that we're going to impose a $500 billion package -- the second in three years -- and that annual deficits will still be $200 billion at the end of this exercise," said Les Alperstein, managing director of NatWest Washington Analysis, a division of NatWest Securities Corp.

An oft-cited defense -- that the plan should be viewed as a first step and that Mr. Clinton's health care reform would help eliminate some of those later increases -- also was rejected by many on Wall Street. Few think that after having to cajole and plead so much this time around, the president has enough political capital left to fight for another round of cuts in future years.

"This guy has called in every chit he has. He owes everybody and his brother. This is not a first step, it's a last step," Mr. Brusca said.

While it would be unfair to say that all of Wall Street was against Mr. Clinton -- many investment bankers helped bankroll the Democrats' November victory and two Wall Street veterans serve in the current Cabinet -- the president's budget has received little respect in New York.

The White House has pointed to the bond market's six-month rally as proof the plan has approval in financial circles.

But bond market analysts say this analysis only shows how out of touch Mr. Clinton is with financial markets.

While the initial bond rally in February was in reaction to the deficit-reduction plan, later gains in the market have come in response to bad economic news and the deficit plan's expected drag on the economy.

Unlike the stock market, the bond market usually rallies on bad economic news -- the theory being that slow growth means low inflation and low interest rates. The interest rates of bonds move inversely to their price. So, instead of applauding the president's plan on his merits, the bond market has been trading upward on the plan's shortcomings.

"The majority [in the business community] believes that the plan would be recessionary, which is good for bonds but not for the economy. Higher taxes will not spur higher [private] spending, so the economy would be slowed down in the long run," said Eric K. Cheung, vice president of Wilmington Trust Co.

These misinterpretations have only heightened a sense of estrangement that many feel in the private sector. Unlike in the 1980s, when New York's financial district was well-connected to Washington, Wall Street now feels relatively ignored.

Mr. Alperstein, who works out of Washington and analyzes it for Wall Street companies, said their complaints have been written off in Washington as mere griping by "fat cats" about higher taxes.

By next year, however, Mr. Clinton is likely to realize that these new taxes will not allow the economy to grow strongly in time for the 1996 election, forcing him to cut taxes or boost spending, said David Shulman, Salomon Bros.' equity strategist.

At the same time, interest rates will probably begin to increase -- further proof that interest rates have not declined due to the deficit-reduction package, Mr. Shulman said.

"The Clinton program will not recharge the struggling economy, but rather lock it into the slow growth path that it has been on since 1989, which likely will disappoint all but his most avid supporters," Mr. Shulman said.

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