Budget Scheme Relies On Record Roll Balancing Act Requires Record Economic Expansion

The booming economy made it easier for President Clinton and congressional leaders to put off the hardest choices and still balance the budget - on paper at least.

But the whole deal depends on a stretch of prosperity the likes of which has never been seen.

Certainly Monday’s market performance did nothing to discourage those hopes.

The Dow finished with a gain of 143.29 points at 7,214.49, its fourth-highest point gain ever. The Dow had never even closed above 7,100 before.

The previous closing high was 7,085.16.

The economy’s current expansion is already the third longest in history. If it lasts until the beginning of 2000, it will break the record set during the 1960s, when U.S. growth was helped by the Vietnam War buildup and spending on Lyndon Johnson’s Great Society.

But setting a record of more than nine years of growth unbroken by a recession won’t be enough. The economy will have to keep sailing ahead without a downturn for another three years to reach the assumptions necessary for balance in 2002.

That’s because economic downturns mean more people out of work and lower corporate profits. That in turn means lower government tax revenues and higher spending on such things as unemployment benefits and welfare. Even a mild recession beginning in 1999 would add $100 billion to the deficit in 2002, by one estimate.

In putting together their deal last week, budget-writers not only assumed that no recession would darken America’s doorstep through 2002 but that things will turn out even better than previously believed.

In fact, it was a last-minute windfall found by the Congressional Budget Office that proved to be the key ingredient to clinch the deal.

CBO sent a letter to leaders of the House and Senate budget committees saying that unexpectedly strong tax collections so far this year had convinced its forecasters to lower the deficit estimate for this year by $45 billion. The new CBO estimates provided $225 billion in new money over five years.

Confronted with this new pot of money, negotiators were able to cushion the cuts needed in domestic programs Clinton was trying to protect and provide the tax cuts Republicans have long sought.

The sudden appearance of the new money raised more than a few eyebrows. The CBO normally doesn’t update its economic forecast until August.

But analysts said the fact that the economy has been stronger than anyone anticipated certainly cannot be disputed. On the same day the budget deal was announced, the government reported the jobless rate fell to a 23-year low of 4.9 percent, reflecting that the economy grew at a torrid 5.6 percent pace in the first three months of the year.

The increase in projected tax revenues also reflects more-optimistic CBO assumptions on how much profits American businesses will earn and bigger tax payments by individuals.

All these projected developments could occur. Private forecasters said the new CBO estimates, while on the optimistic side, were not out of line with the economy’s recent good performance or with forecasts being made on Wall Street.

“This isn’t a return to the rosy scenarios employed for budgets during the 1980s. These numbers aren’t wild,” said Stanley Collender, top budget expert at Burson-Marsteller.

But that still leaves open the question of how much longer the good times will last. The Federal Reserve in March began raising interest rates to slow things down and many analysts believe more rate hikes are in store. If the Fed miscalculates and overdoes the rate hikes, then instead of prolonging the current expansion by dampening inflation, the central bank could bring on the next downturn - and rising budget deficits.

But economists, normally a gloomy lot, are prepared, given the current strong growth and low inflation, to believe that Federal Reserve Chairman Alan Greenspan and his colleagues will be able to pull off another soft landing.

Those inclined to grumble about last week’s budget deal note that budget-writers avoided making reforms that will eventually be needed in Social Security and Medicare to keep the retirement of 70 million baby boomers from sending the deficits soaring again after 2002.

But even there, deficit hawks said they were ready to settle for agreement to achieve what would be the first balanced budget in three decades and wait for further reforms to come.