WASHINGTON -- The Clinton administration's report that the federal budget deficit fell for the third straight year, to $203 billion for fiscal 1994, represents an achievement of sorts.

But it doesn't mean the government has come to grips with its insatiable appetite to overspend and pile up debt.

Although White House officials like to remind voters of President Clinton's accomplishments in deficit reduction, Wall Street is not impressed and remains

worried about a steady stream of government red ink flowing into the next century.

Wall Street analysts expected a deficit of around $200 billion for the fiscal year ending Sept. 30.

In the grim world of federal balance sheets, a $200 billion deficit is a significant improvement over the 1993 deficit of $255 billion and the peak of $290 billion in 1990. Moreover, the Congressional Budget Office projects that if the economy remains solid and keeps boosting tax receipts, the deficit will shrink again next year to $162 billion.

"Washington policymakers, still fixated on budget deficits, see great 'progress in the budget,' "says Mickey Levy, chief financial economist for NationsBank.

But he adds, "This progress is illusory."

The administration has benefited from a few temporary factors, Levy argues in a market letrex, but its budget efforts haven't gone to the heart of the problem. He says the long-term outlook is still unpromising -- a point Federal Reserve Chairman Alan Greenspan made in testimony this year to the bipartisan budget commission headed by Sen. Bob Kerrey, D-Neb.

Mr. Clinton has been able to slash the deficit this year by hacking away at the defense industry and raising taxes on the rich. Tax revenues have also accelerated because of surprisingly strong economic growth.

Mr. Levy figures that the combination of a hearty economy and higher taxes booster revenues nearly 10% this year, up from 5.7% last year. Most of the increase in taxes was paid by high-income households, while the middle class chipped in with a 4.5 cent-per-gallon increase in gasoline taxes.

The Clinton budget has also benefited from the end to the savings and loan bailout. As recently as 1991, the Bush administration paid out $66.1 billion m pay off depositors as it shut down failed thrifts. Lately, the government has been taking in money as it sold off assets from the thrifts taken over by the Resolution Trust Corp.

But spending, which is the government's field of expertise, remains out of control. "Spending on domestic programs has continued to soar," says Mr. Levy, noting that from 1990 to 1994 spending on Social Security, Medicare, and other mandatory programs rose 8.8% a year.

Under current law, the deficit will level off next year and begin rising again in following years. That is because the government will still be pouring money into entitlement programs and will run out of room to make further cuts in defense and discretionary programs everything from the National Park Service to meat inspection.

Meanwhile, higher interest rates and a rising national debt are forcing the government to shell out more in interest payments.

Mr. Levy estimates that net interest payments this year will total more than $200 billion, equaling about 14% of all federal outlays.

The Bond Buyer is a sister publication of the American Banker.

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