Reagan's credibility faces crucial testing time; Trend of the economy
All of us, as individuals or families, make assumptions on which we base our future economic planning. So does the federal government, and that is where the budget tangle begins.Skip to next paragraph
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Budget planning takes so far in advance that no one can be sure how the vast US economy will perform in a future budget year.
Right now, for example, the Office of Management and Budget (OMB), the budget arm of the White House, is preparing "target letters" to send to Cabinet secretaries and other agency heads telling them how much they can expect to spend in fiscal 1983.
1983? At a time when the final results of 1981 are not yeat in place and debate rages over how much more may have to be cut from the 1982 budget?
How can anyone rationally plan ahead to 1983 without knowing how high inflation will be, how many Americans will be jobless, how briskly (if at all) the economy may be growing, and where interest rates will stand?
The answer is that no one can rationally plan so far ahead. Yet President Reagan, by law, must present his 1983 budget to Congress next January, only five months from now.
So the experts at OMB, with the help of whirring computers, make the best guesses they can, extrapolating from what the economy is doing now. These guesses are dignified by being called "assumptions."
The White House, in its latest projection, assumes that consumer prices will climb 5.7 percent in calendar 1983, that the economy will grow by 5 percent. that unemployment will average 6.6 percent, and that the interest rate on 91-day Treasury bills will be 7.5 percent.
Right now, by contrast, inflation runs at about a 9 percent annual rate, the economy is not growing at all unemployment is 7.0 percent, and Treasury bills are paying more than 15 percent.
In other words, those White House assumptions on which 1983 budget planning now is based are pretty optimistic. A White House document admits that these figures "are simply projections of the trend of economic performance expected under the administration's new economic policy."
But the White House is not the only federal agency involved in budget planning. Congress, through the Congressional Budget Office (CBO), also studies the economy, draws its own conclusions, and applies them to the budget that the President sends up.
Then the fur begins to fly, as now is the case over the 1982 budget, because the CBO and White House seldom agree on economic assumptions.
The CBO, reading its own set of tea leaves, contends that the 1982 budget deficit will be $15 billion or so higher than the $42.5 billion shortfall predicted by Mr. Reagan.
Either the President must accept a bigger 1982 deficit, congressional analysts say, or the budget will have to be slashed by additional billions.
Reagan says he still wants a $42.5 billion shortfall, as a step toward a balanced 1984 budget. So the outlook is for a battle royal over the 1982 budget , when Congress and Reagan come back to town after Labor Day.
If Mr. Reagan is determined to hold the 1982 deficit to $42.5 billion he appears to have to alternatives:
* He can try to battle through Congress additional spending cuts, in a budget already trimmed by more than $35 billion.
* He can veto appropriation bills that threaten, in the White House view, to bust the budget.
Neither course would be popular with Congress. The fact is, if the economic assumptions underlying the President's 1982 budget are flawed, then it is almost impossible to produce the results he wants.
Much of the disagreement between OMB and CBO is couched in terms of assumptions.Congressional assumptions, according to White House officials, are "faulty." OMB assumptions, says the CBO, are overly optimistic.
Often, of course, the problem of a budget gone askew stems from economic shifts and changes over which no one has control and that could not be foreseen when budget assumptions were made.