How Long Can We Make the Payments? : Yawning federal deficit mortgages the U.S. future and suffocates the recovery

Noticeably ignored in the continuing economic debate is the ballooning budget deficit, which will expand to a record of nearly $400 billion this year. All the action in Washington instead has focused on tax relief for the middle class--a political quick hit with no real long-term economic return. The monstrous deficit and lack of investment--not taxes--are the biggest drags on the economy.

The President vetoed the Democratic tax-cut legislation, which Congress passed last Friday. The bill included a few worthwhile reforms, such as a $5,000 credit for first-time home buyers, but the unattractive elements were overwhelming: An ill-conceived cut in the capital gains tax and reinstatement of tax breaks for commercial real estate. The President gave it thumbs down, mostly because of partisan politics, but the veto was a good thing, no matter what the reason. Of course, the President’s own tax-cut bill was no better.

Uncertainty about what Washington would do about taxes was unsettling the markets and putting upward pressure on long-term interest rates despite the Federal Reserve’s big discount-rate cut last December. Tax cuts could mean bigger tax increases a few years from now--and would, in the meantime, only plunge the deficit deeper in the red.

The White House, which had been forecasting a surplus in fiscal 1996, is now saying that the budget will instead be in the red by $180 billion that year. The Congressional Budget Office predicts a $423-billion deficit by the year 2002. A new report by the Federal Reserve Bank of New York blamed the deficit for slowing economic growth in the 1980s and predicted that it will have the same effect in the 1990s.

An economic growth package must factor in mechanisms to pare the deficit down to a more manageable size. The huge sums consumed by the public debt are dollars diverted from savings and investment that could mean jobs and an improving standard of living. Fiscal policy that addresses these issues is crucial to the delicate economic recovery that appears to be under way.