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What's behind ballooning US deficit figures

By Harry B. EllisSenior economics correspondent of The Christian Science Monitor / December 9, 1981



Washington

No president in US history has faced the kind of figures that Ronald Reagan has just been handed by his team of economic advisers. The man who had hoped to balance the federal budget now will preside, his aides told him, over the largest deficits ever - an estimated $109 billion this fiscal year, $152 billion in fiscal 1983, and $162 billion the following year.

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These are the shortfalls that White House officials predict, if there were no more spending cuts or - equally important - no more tax increases over the next three years.

Recession is the primary reason why deficit figures have mushroomed beyond the $43.1 billion for 1982 that Mr. Reagan had expected less than three months ago.

Recession causes tax revenues to slump and government outlays to swell, in the form of unemployment compensation payments and associated costs.

Every 1 percent rise in the jobless rate, for example, costs the US Treasury from $25 billion to $30 billion in a fiscal year through the combination of lost taxes and additional outlays.

The recession is not of Reagan's making. But it forces upon him some radical revisions of his economic game plan. This is the true meaning of the deficit figures he now has in hand.

No longer can he hope to narrow the yawning budget gap through spending cuts alone, unless he is willing to trim many billions of dollars from the huge defense expenditures he wants.

The latest economic forecast, including the budget deficits, was prepared chiefly by the Council of Economic Advisers (CEA), headed by Murray Weidenbaum, and the Office of Management and Budget (OMB), led by David A. Stockman.

Officials stress that the assessment is ''preliminary'' and may change by the time the President presents his 1983 budget to Congress next month.

But the choices confronting Reagan will remain the same, no matter if specific figures go up or down.

The recession, first of all, results primarily from the tenacious effort of the Federal Reserve Board to wring some inflation out of the economy by a tight money policy.

Economist Walter W. Heller, in an interview, called it a ''Carter, Reagan, Volcker recession,'' meaning that the effort to curb the growth of the money supply stretches back over several years.

Fed chairman Paul A. Volcker defends the central bank's policy as the government's only working tool against inflation, until Congress and the White House - through a combination of tax and spending policies - join in the antiinflation fight.

Experts, including Mr. Volcker, warn that the magnitude of the Reagan personal income tax cuts threatens to unleash a new round of inflation, by stimulating demand for goods and services.

Widespread concern on this score along Wall Street impelled the financial community to keep interest rates high during the bulk of 1981, until the current recession struck.

''The ferocity of the sustained high interest rates,'' said Dr. Heller, ''to some extent was due to the impending tax cuts.''

In this sense the President's policies may have contributed to, but not caused, the current economic slowdown.

So far, according to White House officials, Reagan's inclination is to stress the primacy of spending cuts. He still shies away from significant trims in defense outlays and precludes major tax boosts.

Under these conditions, spending cuts being prepared for fiscal 1983 would fall most heavily on programs affecting poor, aged, handicapped, and other vulnerable people.

Some 70 percent of the $35.2 billion sliced from the fiscal 1982 budget came from such programs. In September the President asked for additional cuts.

Congress balked. OMB now hopes to embody these and other cuts in the fiscal 1983 budget. Even if legislators were to go along - which many analysts doubt - spending cuts by themselves would be inadequate.

Reagan's aides, including Stockman and Weidenbaum, are believed to be telling Reagan that essentially he has three choices, in addition to nondefense budget cuts:

* He can prune entitlement programs, such as social security, from which more than 35 million Americans derive benefits.

* He can slice billions of dollars from defense programs, to spread the burden of budget-cutting more equitably.

* He can increase tax revenues - either by postponing the third round of individual tax cuts scheduled for July 1, 1983, or by enacting new taxes.

How the President will decide - what mix of changes he may accept - remains unclear. But the stakes are very high.

Huge budget deficits, for example, threaten to send interest rates on a new upward spiral, as the US Treasury gobbles up more of the nation's available capital to finance a growing flood of government red ink. Estimated US budget deficits (Billions of dollars) 1981 1982 1983 1984