Clinton budget to show deficit falling to $235 billion, former budget aide says.

WASHINGTON -- President Clinton's budget, due to be released Feb. 7, is likely to show the deficit turning the corner and falling noticeably from previous forecasts to around $235 billion in the current fiscal year and $215 billion in fiscal 1995, a former top budget aide said yesterday.

Meanwhile, administration officials signed off Tuesday on a tentative economic forecast for next year that largely parallels the mid-session budget released in September, a senior official said.

The revised outlook essentially maintains the assumption that the yield on the Treasury 10-year note will stay around 6%, with inflation and economic growth rising by 3%, the official said.

The #235 billion and $215 billion deficit forecasts are extrapolations by a top Office of Management and Budget official and are based on the White House's updated economic forecast combined with technical re-estimates and changes likely to be made as a result of ongoing policy debates within the administration, the budget aide said.

An OMB spokesman said he could not confirm either projected dificit figure. He said the administration's deficit figures will not be firm until early next year.

The forecasts could change noticeably, according to the budget aide, if, for example, President Clinton were to accede to the Defense Department's request to increase defense spending by $50 billion over the next five years. Many other executive departments also have requested substantial increases that would affect the deficit outlook both in the near-term and the long run, he said.

The unofficial $235 billion forecast for 1994 represents a significant decrease in the OMB's September projection of $259.4 billion, and largely reflects stronger economic growth and a surge in tax receipts since enactment of this summer's tax bill, as well as lower inflation and interest rates, the aide said.

When combined with the $215 billion forecast for fiscal 1995, which is somewhat higher than the OMB's previous $200 billion forecast, the February forecast "will show a downward path that would be a lot better than expected" recently in the financial markets, the budget aide said.

OMB director Leon Panetta last week also revealed that the forecast will show marked improvement in the long term with the deficit falling to nearly $150 billion by 1998 from its high of $ 290 billion in 1992. But private forecasters are highly skeptical of the OMB's long-term figures because they are based on the assumptions that President Clinton's health care reform plan will be enacted and that it will reduce the deficit in the long run.

The $235 billion projection for 1994, on the other hand, is within the ball park of recent estimates by private economists. To a large extent, as with the private forecasts, the admininstration's improved 1994 outlook reflects the continuation of a trend begun in 1993 from lower interest rates, which among other things prompts technical re-estimates of lower spending on the savings and loan bailout, according to Robert Rubin, chairman of Clinton's National Economic Council.

Lower rates also trim federal borrowing costs.

William Griggs of the forecasting firm Griggs & Santow Inc. said his firm is projecting a deficit between $220 billion and $230 billion in 1994 based on an economic forecast of growth and inflation of around 3% next year.

While this is very close to the reported administration figure, Griggs said that the firm parts company with the OMB on its longer-range forecasts, starting with 1995. He said he expects the deficit to rise back to between $250 billion and $300 billion in 1995, rather than decrease as OMB is projecting, in part because he expects enactment of a health care reform plan to increase the deficit.

"Our feeling is that whatever happens with health care will cost a lot in the beginning, and we don't think the economy will be a whole lot stronger in 1995," Griggs said. "We also don't see a lot more happening on the receipt side, no surge in receipts as we've seen so far this year" resulting from the enactment of last summer's tax bill, Griggs said.

The forecasting firm also sees fewer gains from defense cuts in future years, perhaps as a result of the internal debate over defense now raging within the administration. "I don't think we will keep reducing defense spending as rapidly as you have in recent years," Griggs said.

In taking strong issue with the administration on the impact of its health care plan, Griggs said his firm was not objecting to the thrust of the plan, which is to simultaneously reduce the deficit through cuts in government health care spending while lowering health care costs for private employers.

"We're not arguing so much with idea of what they're trying to do. The question is whether we can achieve the kinds of economies they are projecting fast enough to do the job," Griggs said.

The administration's updated economic forecast is prepared by the OMB in conjunction with the Treasury Department and the president's Council of Economic Advisers.

The forecast for real gross domestic product in 1994 is expected to be around 3%, which would represent moderate growth in line with estimates of private forecasters.

The two main areas of uncertainty in next year's forecast are unemployment and inflation, which may be revised down from the mid-session estimate of a 3.3% rise in the consumer price index, the senior official said.

The recent drop in world oil prices to less than $15 a barrel is forcing economists to reassess their inflation predictions for next year, but no one knows whether oil producers will be able to restore some restraints to production that might raise prices again. If the current fall in prices is sustained, it could shave as much as half a percentage point from the CPI, economists say.

At the same time, lower oil prices provide consumers with more disposable income that could spur spending and add to GDP growth.

The administration official said there is also uncertainty about the unemployment rate, which was forecast to edge down to 6.5% by the fourth quarter of next year. The November jobless rate tumbled unexpectedly to 6.4%, but the Labor Department plans to introduce a new household survey method that could push unemployment back up by as much as half a percentage point.

The new methodology will be applied to the January unemployment series, to be released Feb. 4.

The administration's forecast assumes short-term rates rise gradually, bringing the rate on 90-day Treasury bills up from the current 3.1% to 3.6%. That estimate, too, is not likely to change much, the official said.

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