Federal Budget Deficit May Shrink All by Itself GIFT FROM WALL STREET

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Look for a significant drop in the budget deficit this year - perhaps as much as 23 percent - even if Washington takes no legislative action to reduce it.

The economy may simply do what a free market system is supposed to do: take care of itself - no thanks, or credit, to President Clinton or Congress.

Economic growth and soaring stock prices should generate higher tax revenues and lower welfare costs, shrinking the deficit as low as $83 billion for fiscal 1997, down from the current $107 billion, projects Joel Prakken, chief economist at Macroeconomic Advisers in St. Louis. With the stock market already up about 9 percent for the year, after a 26 percent jump last year, investors can be expected to beef up federal tax coffers through the capital-gains taxes they pay on stock profits. Ironically, a proposed budget change now in the congressional spotlight would reduce those tax revenues by reducing the capital-gains tax rate. The US economy this year is expected to match last year's growth of 2.5 percent, turning more welfare recipients into paycheck recipients. Differing forecast Not everyone shares Mr. Prakken's optimism, however. For instance, Cynthia Latta, an economist at DRI/McGraw-Hill, a Lexington, Mass. consulting firm, expects a $10 billion increase in the deficit this year to $117 billion. The Clinton administration itself puts the deficit still higher, $125.6 billion. Through January, the deficit totals $45.96 billion, higher than the $36.29 billion in the same four months a year earlier. Both the White House and the Republican leadership have proposed changes to the budget process that could skew the numbers even more - cutting some taxes for political friends, raising other taxes without seeming to do so, all in a drive to balance the federal budget. "It is really very difficult to do that," says Robert Greenstein, director of the Center on Budget and Policy Priorities (CBPP), a Washington think tank. Both sides have proposed budgets that balance by 2002. …

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