Strong economy allows a reduction in the debt

WASHINGTON (AP) — For only the second time in 16 years, the government plans to pay off a tiny sliver of the national debt this quarter.
But the government will return to its borrowing ways in the summer.
The temporary $65 billion reduction in the $5.21 trillion debt accumulated since the founding of the republic underscores that the annual budget deficit is likely to shrink for the fifth year in a row.
And that could make life easier for administration and congressional negotiators struggling to cut a deal this week to balance the budget by 2002. It means less debt will accumulate, and during the next few years, there’ll be less interest for taxpayers to shoulder.
“The economy has been robust, tax revenue has been strong, spending has been relatively contained,” said economist Bruce Steinberg of Merrill Lynch in New York. “The 1997 deficit will be $80 billion, maybe even less. That’s remarkable.”
The deficit in 1996 was $107 billion, and as recently as January, both the Clinton administration and the Congressional Budget Office projected a 1997 deficit of around $125 billion.
They and nearly every other economic forecaster didn’t count on the strong 3.8 percent economic growth in the October-December quarter, the first of the fiscal year, picking up steam in the January-March period. That’s produced millions of new jobs and windfall of tax payments.
“Virtually all of the decrease in our cash needs is explained by an unexpectedly large surge in tax receipts,” said Paul Malvey, the associate director of Treasury’s Office of Market Finance.
Through March, the government’s revenue was running $50 billion, or 8 percent, ahead of the same period of fiscal 1996 while spending was up only 4.3 percent.
The reduction represents only about 1.25 percent of the national debt. Still, it’s the largest quarterly paring of the debt ever.
If analysts such as Steinberg are correct about the magnitude of the shrinkage in the deficit, it will represent just 1 percent of gross domestic product, the lowest since 1974.
But economists warned government officials not to get carried away and think the annual deficit, let alone the accumulated debt, go away on their own.
In the short run, the Federal Reserve is raising interest rates and the resulting economic slowdown could send the deficit modestly higher in 1998 and 1999. In the next decade, the government will have to cope with the wave of baby boomers retiring. It projects mushrooming Social Security and Medicare costs.