Not too long ago, budget watchers were boosting their estimates of fiscal 1995's deficit in the wake of growing outlays for interest on the national debt. Indeed, the Administration's own deficit projection in February showed a mere $10 billion decline from last year's $203 billion shortfall.
Now, however, experts at Morgan Stanley & Co. see a significant improvement. "We think the deficit could come in as low as $165 billion to $170 billion, " says economist David J. Greenlaw.
The recent slippage in interest rates has obviously contributed to the brighter budget outlook. But more important, says Greenlaw, is an unexpected surge in income-tax receipts during the April taxpaying season--a surge that Greenlaw believes helps to explain the slump in consumption early this year.
According to the government's tally, consumers have had to ante up a much larger chunk of final settlements on 1994 income-tax liabilities than they did in former years. In 1994, for example, individual income-tax payments from Apr. 1 through May 15 were up only $6.9 billion, or 11.7%, over 1993. This year, such receipts over the same period soared by more than 30%, or $20.1 billion.
It's likely that consumer spending was also restrained by a slowdown in the pace of income-tax refund disbursements by the government earlier this year. Because the shortfall relative to year-earlier trends never exceeded $6 billion and was entirely eliminated by mid-April, however, Greenlaw believes the big increase in final tax payments in April is the true culprit behind the more recent sag in consumer demand.
Why the jump in tax liabilities? Some of it may be due to a rise in capital-gains realizations last year by stock and bond market investors, and some may reflect payments by the relatively few taxpayers who chose to defer part of their liabilities from the 1993 tax hike. But a key reason, argues Greenlaw, is the delayed effect of the record wave of home-mortgage refinancing inspired by low interest rates in 1992 and 1993.
Greenlaw believes the refinancing boom significantly lowered homeowners' mortgage interest tax deductions for 1994, causing many to pony up higher final tax payments in April. Indeed, mortgage debt service payments fell to 5.7% of disposable personal income last year from 7% a few years earlier.
Looking ahead, Greenlaw thinks that the inhibiting impact of the April tax hit on spending will soon dissipate. By July, he says, "personal consumption should be posting healthy growth again."