NCPA - National Center for Policy Analysis

Factors Behind The Shrinking Budget Deficit

August 1, 1996

While the federal government is still spending more than it is taking in in revenues, it's not spending quite as much as it thought it was spending. In Washington, D.C., such a development is reason enough for a lot of self-congratulation.

  • The Office of Management and Budget now estimates the government will spend $117 billion more this fiscal year than it will garner in revenues, and $126 billion more next year.
  • That represents a reduction of $43 billion from earlier estimates.
  • The Congressional Budget Office will reportedly release its own budget outlook in mid-August, revising its previous estimates downward by about $96 billion.
  • The CBO had already said the deficit would be between $115 billion and $130 billion -- down from prior forecasts of $211 billion.

While the White House says the reductions are due to Clinton's economic policies and Republicans in Congress credit their own efforts to balance the budget and cut discretionary spending, economists credit a variety of factors.

  • The government's tax receipts this year are expected to be a whopping 33 percent higher than those in fiscal 1992 -- with collections in the current fiscal year expected to be $97 billion higher than projected by the CBO three and one-half years ago.
  • This is largely the result of a stronger than expected economy, higher corporate profits and increased investor gains (which the government can tax twice).
  • Annual growth of gross domestic product has averaged 2.4 percent since the start of 1993 -- slightly higher than the 2.2 percent originally assumed.
  • The Treasury estimates that tax increases in 1993 have brought in about $50 billion a year, although some critics contend the Clinton Administration used much of it for additional spending, not deficit reduction -- "sucking money out of the economy like crazy," as one analyst put it.

But higher tax revenues are not the only factor.

  • Increases in Medicare and Medicaid spending have not been quite as high as originally anticipated, which -- coupled with the fact that Clinton's enormously expensive health care reform program was defeated -- held down costs in the health care area.
  • The CBO in 1993 over-estimated costs for the final stages of the savings and loan bailout by about $80 billion.
  • Congressional cuts in defense spending and some domestic programs have contributed to the deficit reduction.
  • As both interest rates and the size of the annual budget deficits have fallen, the government's interest costs have been less than expected.

Heartening as the deficit news may be, economists warn that the long term picture remains bleak since nothing has been done to solve the Social Security problem just as a tidal wave of baby boomers sweeps toward retirement. And the rough political battles this year have made even deficit hawks shy away from reforming Medicare, Medicaid and Social Security.

Sources: Jackie Calmes, "Scary Deficit Forecasts for Clinton Years Fade as Tax Revenue Grows," Wall Street Journal and Adrienne Fox, "Who Gets Credit for Less Red Ink?" Investor's Business Daily, both August 1, 1996.


Browse more articles on Tax and Spending Issues