Now, a struggle to balance the nation's checkbook

By , Senior economics correspondent of The Christian Science Monitor

When the new Congress convenes in January, pressure will mount to correct what many experts believe to be a basic flaw in President Reagan's economic program.

That flaw is the growing imbalance between the amount of money the government collects in taxes and the amount it spends, resulting in ever-larger deficits.

Much attention is paid to the sharp cuts which Mr. Reagan and Congress made last year and this in social programs, mainly affecting the elderly, handicapped , and poor. But those cuts, however severe, were confined to a small part of the budget.

Recommended: Could you pass a US citizenship test?

Overall, federal government spending has grown in the past two years, spurred by increases in three major categories - defense, social security (including medicare) and interest on the national debt.

At the same time, government revenues are declining as a percentage of the gross national product (GNP), or total economic output, because of the three-year income-tax cuts enacted by the administration and Congress.

Recession, of course, also reduces revenues and boosts outlays, since people out of work - now more than 12 million Americans when all categories are counted - pay no income taxes and in many cases receive government compensation.

This factor aside, however, tax revenues - which in fiscal 1981 amounted to 21 percent of GNP - are likely to drop to 18 percent by 1985 because of the 1981 tax cuts. Some analysts say the $99 billion tax in-uflogo14Trend of the economycrease passed this year may limit the decline to 19 percent.

Federal spending, by contrast, will remain constant at 23 percent of GNP, according to the Congressional Budget Office (CBO). Under these projections, the deficit will rise from 2 percent of GNP in fiscal 1981 to 5 percent by 1985.

This background prompts many congressional and private analysts, though not the White House, to predict budget shortfalls in the range of $180 billion in the current 1983 fiscal year, rising to $200 billion or more in the years ahead.

Already, in his first full budget year in office, the President has endured a record deficit of $110.7 billion for fiscal 1982, nearly twice the previous record - a $65.6 billion shortfall chalked up in Gerald R. Ford's last year as President.

To some extent the Reagan deficit is a product of the current recession, which stems partly from the tight money policy of the Federal Reserve Board, not directly from the President's program.

Unemployment, which stood at 7.4 percent of the work force when Mr. Reagan took office, had increased to 10.1 percent when fiscal 1982 ended on Sept. 30 of this year. (In October, the first month of fiscal 1983, the figure rose to 10.4 percent, the highest level since the 14.6 percent in 1940.)

Each 1 percent rise in umemployment, according to government analysts, costs the US Treasury about $25 billion through tax loss and additional outlays. This would account for roughly $75 billion of the deficits so far recorded during the Reagan years.

If the new Congress does indeed tackle the problem of realigning income and outlays, this can be done in a number of ways:

The first target is likely to be the federal budget, which now is rising even faster than Mr. Reagan had planned when he entered the Oval Office.

Another priority will be the associated problems of social security and medicare. A cap on the growth rate of these programs and of military spending would do much to rein in the rising deficits.

Falling interest rates also help because the US Treasury, like every one else , pays market rates for the money it borrows. Interest now absorbs 13 cents of every tax dollar. The administration cannot count on rapid economic recovery to build up tax revenues. Most experts in and out of government expect recovery, when it finally comes, to be modest - much slower than after most postwar recessions.

Business spending on new plants and equipment, according to McGraw-Hill economists, may dip 8.5 percent next year in inflation-adjusted dollars. Businessmen apparently plan to use existing idle industrial capacity before investing in plant modernization or expansion.

If this forecast turns out to be correct, unemployment is likely to remain high, perhaps in the 9 percent range, until well into 1983. A spotlight, therefore, is likely to fall on taxes, if federal revenues are to play a role in reducing deficits.

The President says only a ''palace coup'' could persuade him to raise taxes again, after his reluctant agreement to the $99 billion tax hike of 1982. But one way to raise revenues would be for Congress to abolish the third year of the tax cuts, scheduled for next July. To make this stick, Congress might have to override a presidential veto.

Another tactic available to Congress would be cancellation of ''indexation,'' a controversial measure designed to prevent taxpayers from being pushed into higher tax brackets by inflation. While indexation - due to begin in 1985 - might sound fine to taxpayers, it would reduce treasury revenues by billions of dollars yearly.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...