Smith Barney Economist Opposes Tax Cut Applying Any Surplus To Deficit Could Pay Dividends In Future

A tax cut would be a mistake even if the federal Treasury collects more money than it pays out the next couple of years, the chief economist for the Smith Barney brokerage firm said Wednesday.

Mitchell Held said he projects surpluses of $40 billion this year and $20 billion in 1999.

But those overflows - the first since 1969 - are the result of capital gains revenues and income taxes on huge incentive packages for corporate executives, sources that could dry up quickly if Wall Street suffers a downturn, he said.

Also, Held said, tax cuts could be counterproductive.

“We don’t need stimulus when your economy’s at full employment,” he said.

Better to apply any surpluses to the nation’s $5 trillion deficit, Held said. Subsequent reductions in federal borrowing will then lower interest rates and cut consumer loan costs.

Held, in Spokane to address a Gonzaga University audience, in a separate interview praised the nation’s business and political leaders for managing the economy.

Congress and President Clinton have surprised observers by living within spending caps, he said. And the Federal Reserve Bank’s monetary policy has kept economic growth at about the appropriate rate.

“We’ve had a wonderful business cycle,” Held said. “This year things still look pretty good.”

He said inflation this year should run about 1.5 percent, with gross domestic product - the yardstick for economic growth - rising between 2 percent and 2.5 percent.

He predicted the Fed will not raise interest rates until early 1999.

Although stocks have had a somewhat rocky start this year, Held said 1998 should turn out well. There won’t be a correction unless the Fed changes course, he said.

Held said the turmoil in Asia took pressure off the nation’s central bank to control inflation. Low-cost imports will restrain domestic prices, he said.

Held added that foreign lenders have done well handling the Asian debt crisis, but hurdles remain.

International Monetary Fund commitments in the region must be funded, he said, and there will be lingering resentment among those who suffer while the affected nation’s sort out their problems.

, DataTimes