WASHINGTON -- The Office of Management and Budget yesterday predicted a significant improvement in the federal budget deficit, with the yearly shortfall dropping to well below $200 billion starting in 1996, largely as a result of the enactment of President Bill Clinton's budget plan.

In its mid-session budget review, the OMB projected the deficit falling to $200.4 billion by fiscal 1995, after reaching %285.3 billion in the current fiscal year ending Sept. 30 and $259.4 billion in 1994.

From 1996 to 1998, the fifth year under the $505 billion deficit reduction plan, the deficit will decline to $180 billion -- reaching its lowest point since 1989, the OMB said. By 1998, the OMB also estimates that the deficit's share of the gross domestic product will be more than halved, to 2.2% from 4.6%.

Without enactment of the plan, both the OMB and the Congressional Budget Office have projected the deficit bloating to nearly $400 billion in 1998.

The CBO in its midyear update expected next week will, like the OMB, show the deficit plan producing a "significant improvement" in that otherwise dire deficit outlook, said Mark Desautels, the CBO's press officer.

But the deficit reductions seen by the CBO may not be as pronounced as OMB's, Desautels said, because the CBO does not give credit for some of the $76 billion of debt service and debt management savings that OMB says will stem from the Clinton plan.

The OMB forecast incorporates not only its latest estimates of the effects of the budget plan, but a significantly revised economic outlook that reflects substantially lower interest rates and stronger but still modest growth in future years.

The OMB now estimates that the budget plan will reduce the deficit $504.8 billion by 1998 through a combination of the debt savings, $250.1 billion of tax increases, $107.7 billion of discretionary spending cuts, and $71.3 billion of savings from Medicare, Medicaid, student loans, and other entitlement programs.

By contrast, higher tax collections due to the improved economic outlook since OMB's April forecast, which had relied on a relatively pessimistic CBO forecast, should subtract about $104.1 billion from the deficit through 1998, the OMB said.

The White House agency did not hesitate to link the enactment of the budget plan to the substantial decline in interest rates seen in the last year as well as further projected low rates under its new economic forecast.

"With the enactment of the President's plan, interest rates have resumed the decline that began when the financial markets realized that the President was truly committed to serious deficit reduction," said OMB Director Leon Panetta in releasing the report.

The report says, "The behavior of both stock and bond prices reflects a consensus in the financial markets that the plan will work and will bring the deficit down." It adds that the plan's enactment "finally convinced the financial markets that federal economic policy will be responsible."

The one-and-a-half point drop in 30-year Treasury bond rates since announcement of the plan cannot be attributed alone to "an anticipation of economic weakness" or reduced inflation prospects, the report says.

At the same time rates were falling to historic lows, inflation prospects remained steady and the stock market reached record highs partly in the expectation of continued business profitability, the report says.

Panetta said yesterday's report will be followed later this month by additional steps to reduce the deficit. These will include cost controls on Medicare and Medicaid to be included in Clinton's health-care reform plan, and billions of dollars of management reforms to be proposed by Vice President Al Gore.

Panetta said no final decisions have been made, but the administration is considering cutting Medicare and Medicaid spending by 180 billion to $240 billion under the health-care plan. Much of those savings may be eaten up, however, by expanding the programs to cover additional services such as buying prescription drugs for the elderly, he said.

It was "hard to get" Congress even to consider much smaller cuts in the health-care programs during this year's budget debate, Panetta said. But it may be easier to obtain such big savings in the context of health-care reform because it will "provide better or additional care to people in those programs," he said.

Also this fall, the administration will try to lock in any additional cuts going beyond the 1994 spending ceilings that are achieved through the congressional appropriations process, Panetta said. The administration hopes to ensure that the cuts are used to reduce the deficit and that the money saved is not simply diverted to other programs, he said.

Among the cuts in 1994 appropriations currently under debate in Congress is the cancellation of the $11 billion Superconducting Super Collider.

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