Uncle Sam is a tightwad. Excluding interest on the public debt, the federal government is running a sizable budget surplus, which may deter the Federal Reserve from raising interest rates.

In effect, the government's recent spending pattern is a drag on the economy, giving the central bank less reason to fret about a breakout of inflation, according to economists.

As of July 31, the federal operating budget, which counts all government outlays except net interest expense, was $117.9 billion in the black for the current fiscal year. That is "probably the all-time largest surplus," said Lacy H. Hunt, chief economist at HSBC Markets, New York.

The second-largest operating surplus, $68.3 billion, occurred last year. Of course, the federal budget still has a primary deficit because of payments due to bondholders, but the latest figures offer a fresh perspective on the budget-balancing argument in Washington.

"The reason the U.S. government is running a deficit currently is because of past deficits," Mr. Hunt said, pointing out that federal fiscal policy, as government spending is called, "is indeed very restrictive."

Including the interest paid on borrowings will likely leave a federal deficit of $121 billion at the end of the fiscal year, Sept. 30. The deficit is down dramatically from $163.8 billion last year and $203.1 billion in fiscal 1994.

A $40 billion lower deficit this year "is quite a significant restraint on economic growth," said Philip Braverman, chief economist at DKB Securities USA.

"I'm sure the Fed fully recognizes that fiscal policy is restrictive and is watching the economy very carefully to gauge the extent to which it ought to ease credit," he said, "contrary to the general perception that the Fed ought to be raising rates."

Mr. Braverman said he expects the Fed's monetary policymakers to again pass on raising rates at their Sept. 24 meeting "and then matters will basically be put on the back burner until after the election."

By the time the Federal Open Market Committee meets again in mid- November, "the economy may have slowed enough that the markets will no longer be expecting a tightening move," he said.

Wayne M. Ayers, chief economist at Bank of Boston Corp., has also taken note of the government spending pattern.

"When the fiscal year ends in September," he pointed out, "we will have seen four consecutive declines in the federal deficit. To my knowledge, that has never happened before."

Typically, when Washington runs a surplus except for payments to bondholders, the economy is eventually weakened, he said.

Due to a decline in military outlays, total federal government outlays in the first 10 months of the current fiscal year are up a modest 3.9% from the year before, Mr. Hunt said. "This is virtually unchanged from increases of 3.7% in both 1994 and 1995."

A government operating surplus is expected again next fiscal year, albeit a smaller one than this year's record-setter.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.