Now It's the Surplus Problem

The federal budget has lately been a source of concern in Washington, but for an odd reason: there are unmistakable signs that the deficit is declining. This should be a cause for celebration, and for the most part it is, because it demonstrates that business has been vigorous enough to generate additional revenue for the Government despite the tax cut--and partly because of it. But the deficit decline disturbs many "activist" economists, who advance the neo-Keynesian argument that if business is to grow vigorously, the Government must pump more money into the economy than it takes out.

Balancing Act. After estimating in January that the deficit for fiscal 1965 would be $6.3 billion, the Treasury two weeks ago reduced the estimate to only $3.6 billion, smallest since the surplus year of 1960. Last week came still another indication that the budget is moving closer to balance. The Treasury Department's daily statement for June 30--the last day of fiscal 1965--showed a deficit of only $900 million in all the Government's accounts, including social security. Though many overdue bills and receipts may come in later and change the final figures, the trend is clear. The deficit is likely to decline still further in fiscal 1966, and the budget may well be in surplus in fiscal 1967 (which starts within a year).

Such prospects have inspired some Government economic advisers to call for still further slashes in income taxes and, on top of that, a step-up in federal spending. Asked at his weekend press conference about the possibility of additional tax reductions, President Johnson said that Treasury Secretary Henry Fowler and the tax experts are "working on it." Fowler would not be a bit surprised to see another tax cut, especially favoring lower-income groups. Treasury's top man also expects a budget surplus in a few years, but is not overly concerned about the necessity of finding ways to spend it. He believes that major new programs already in the works will boost Government expenditures: huge outlays are coming for education and medicare--and who can say what defense needs will be?

Toward Reform. The prospects for still lower taxes helped lift business optimism last week. On Wall Street the recently battered stock market rose for the second straight week, and the Dow-Jones industrial average was up four points, to 879.49. Wall Street was further buoyed by news of another kind of surplus: the U.S. balance of payments during the second quarter ran in surplus--by about $250 million--for the first time in four years. If the trend continues, the Government will be able to relax some of its restrictions on profitable U.S. lending and investing abroad. Now that the U.S. is getting its payments under control, it feels strong enough to take some initiative in reforming the international monetary system. Last week Fowler called for the convening of a major world conference to reform the monetary system for the first time since it was set up at Bretton Woods, N.H., in 1944.

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