Optimism is growing that deficit for current fiscal year is shrinking Economic growth means more tax revenue, less government spending


WASHINGTON -- Even as the White House and Congress struggle to find a compromise plan to balance the federal budget, the outlook for the deficit continues to improve, and the shortfall is likely to come in smaller than either the Clinton administration or the Republican leadership had expected.

Government officials attributed the improving outlook to a surge in economic growth and lower unemployment over the past six months that have helped generate more tax revenue and hold down government spending.

Budget analysts said it was too early to give a firm projection of how sharply the deficit was falling this year, and they said that its path would be determined largely by how robustly the economy performs over the next six months.

"The deficit appears to be lower than we thought for this year, and that could bode well for future deficits," said a Republican congressional aide.

"It's early, but the trend is excellent."

But in one compelling illustration of the trend, a study this month by the Congressional Budget Office projected that the deficit could fall to $91.7 billion this year, if the trend for the first five months of the government's year holds steady.

Lowest in 15 years

The deficit last year was $107 billion, the lowest in 15 years, but both the CBO and the Clinton administration's Office of Management and Budget had been projecting that the deficit would increase this year.

The congressional analysis cautioned that it was "too soon to draw any conclusions" about whether the surge in tax revenue generated by the strong economy would continue for the rest of the year and push the deficit below $100 billion for the first time since 1981.

Officials said, however, that they were increasingly confident that their initial budget projections would prove overly pessimistic, as they did last year.

The CBO has already reduced its official estimate of the deficit from $124 billion to $112.3 billion for the year. The administration ......TC has not yet changed its projection of $125.6 billion.

The likelihood that the deficit will be lower than first projected underscores how much of the improvement in the nation's fiscal condition has come not from specific tax and spending decisions in Washington, but from economic forces that have kept the economy growing for more than six years.

The economy grew 3.8 percent in the last three months of 1996, and is projected to have grown about 3 percent in the quarter ended March 31.

Growth in year of 2.3 percent

Although economists expect the economy to slow somewhat, especially now that the Federal Reserve has raised interest rates because of concern that rapid growth will set off inflation, they are still projecting growth for the year to run well above the 2.3 percent forecast in January by the CBO.

People involved in the budget talks said the outlook for the deficit would become much clearer in coming weeks as the Treasury Department tallies the tax revenue it takes in around the April 15 filing deadline.

Tax revenue last year was substantially higher than anticipated, for reasons that analysts said remained murky.

Any reduction in the size of the deficit would make it easier for White House and congressional negotiators to reach a compromise on the budget, since a smaller deficit reduces pressure for the deep spending cuts that the administration is determined to avoid and increases opportunities for the big tax cuts that Republicans are insisting on.

The latest projections could also help promote a compromise in the long-running dispute between the White House and the Congressional leadership over whose economic assumptions to use in calculating future deficits.

Republicans are insisting on using the Congressional Budget Office projections.

Although the budget office currently has a lower deficit estimate than the administration, mostly because it has updated its forecast more recently than the White House, the administration's economic assumptions have generally been more optimistic.

Administration officials met the week before last with members of congressional tax and budget committees, trying to lay the groundwork for a broad agreement on the levels of spending and taxation needed to balance the budget by 2002.

The talks are to continue in the coming week, with both sides saying the odds of a deal are about 50-50.

Not counting on it

Administration officials said they were not yet counting on a lower-than-expected deficit this year but any improvement in the deficit would make a budget deal easier.

"Every year, our projections have been conservative and the deficit has been lower than projected, and we're hopeful that 1997 will be the same," said one senior administration official who spoke on condition of anonymity.

"But we still need to look at more data before having a good sense of whether that will happen."

While cautioning that no one is counting on the deficit falling as low as the $91.7 billion figure in the new congressional analysis, one Republican aide called the finding "very interesting and potentially very helpful" as the two parties try to address the nation's fiscal problems.

The aide, who spoke on condition of anonymity, said that rapidly accelerating spending on entitlement programs such as Medicare was likely to put considerable upward pressure on the deficit again starting next year.

Pub Date: 4/13/97

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