The Clinton bond rally is chugging along. Between Clinton's election last November and the day before the House passed his budget deficit-reduction bill, yields on the 30-year Treasury bond dropped by more than a percentage point, to 6.54%. Since passage, the rally has entered its second leg. Yields fell to 6.44%, and long-term rates are heading lower still.

Lots of people attribute the bond rally to the coming tax deluge that they believe is certain to dampen economic growth, which will keep inflation pressures at bay. They're only partly right. The markets just may be rewarding the first serious attempt in more than a decade to control runaway government debt. They may be saying that government will soon begin to take fewer financial resources from the nation, leaving more for private investment and growth. If this is the markets' message, then interest rates are falling in good measure because of fiscal responsibility, not because the economy is grinding to a halt under a heavy tax burden. Deficit reduction now has a life of its own.

Indeed, Washington appears to be achieving deficit reduction without tanking the economy. The decline in interest rates by more than a percentage point since November may provide just enough stimulus to largely offset the fiscal drag from the deficit-reduction program. Inflation is low, too. The consumer price index rose at a 2.2% annual rate in the latest quarter, and all the evidence, from white-hot international competition to discount shopping, suggest further downward pressures on wages and prices. And interest rates are coming down in Europe and Japan, leaving room for further interest-rate declines in the U.S. Add it all together, and the net result is economic growth hovering around the 21 2% level. Not good, but not awful.

True, in a more ideal world we would have preferred a higher ratio of spending cuts to tax hikes in this budget bill. Yet even before agreement on the deficit-reduction package, there were signs that government spending is decelerating. Government purchases of goods and services has dropped by more than 9% since early 1991. Federal employment, both civilian and military, has declined sharply over the past few years. The new budget projects spending increases at a mere 4% rate during the next five years, the lowest five-year growth rate in more than 20 years. If the numbers come in anywhere close to this, the U.S. could have the best budget record of any industrial nation, with the possible exception of Japan.

The cost of the health-care program is still a wild card, of course. And the additional spending cuts this fall, as promised by President Clinton, will spark more political fights. But Vice-President Gore's National Performance Review has the potential of delivering billions in savings if it cuts antiquated programs left over from the New Deal and successfully downsizes the Health & Human Services Dept. and other federal bureaucracies.

A big, positive surprise could indeed be in the making. The conventional wisdom is that the deficit will come in higher than the government projects, and economic growth lower. But if President Clinton and Congress stick to their guns on budget restraint, the opposite could just possibly be true.

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