Of budgets, ballots, and Reagan's political future; A call to trim 'structural' deficit
Washington — Behind the speculative numbers flowing out of Washington's mill of leaks and rumors, a concerted search is on for ways to limit the growth of budget deficits in the years that lie ahead.
''We can live with large deficits for a year or two,'' says a top-ranking congressional budget expert. ''But the important thing is to cut into that structural deficit over the next five to six years.''
By structural deficit, he means that part of the budget's red ink would remain - and continue to spread - even after economic recovery arrived.
Half of the current deficit, according to President Reagan, is due to recession. Is he right?
''He's in the ballpark,'' said the congressional source. He cited the general rule that every 1 percent climb in unemployment costs the US Treasury between $ 25 billion and $30 billion, mostly in lost tax revenues.
When Mr. Reagan took office the nation's jobless rate stood at 7.4 percent. Today it is 10.8 percent of the work force - 3.4 points higher.
Roughly $100 billion of this year's deficit - projected at nearly $200 billion - would disappear, other things being equal, if unemployment were rolled back to 7.4 percent.
In practice, of course, it would not work out that neatly. Other factors operate to push the deficit up or down.
Still, the fact remains that about half of the current deficit is cyclical - a function of the longest and deepest recession since World War II.
Elimination of that cyclical deficit through economic recovery would be a boon to the nation, putting people back to work, rescuing businesses and farmers.
Recovery per se, however, would not bite into the structural deficit, which - under current tax and spending laws - would continue to grow.
Lawrence A. Kudlow, a top official of the Office of Management and Budget, says he believes the structural deficit could soar to $150-$175 billion by fiscal year 1988, even with recovery.
This results from a growing gap between government income and outlays, occasioned by the mix of policies inaugurated by the Reagan administration. Huge tax cuts, culminating in indexing of income tax rates, coupled with enormous increases in defense outlays, produce the gap.
Government revenues, says Alice M. Rivlin, the director of the Congressional Budget Office, will fall from 21 percent of gross national product in fiscal 1981 to 18 or 19 percent of GNP in 1987, under current policy assumptions. Federal spending, by contrast, remains constant at 23 percent of GNP.
The deficit, as a result, rises from 2 percent of the nation's total economy in 1981 to 5 percent or more in 1987. Therein lies the structural deficit.
''Historically,'' says Dr. Rivlin, ''the deficit goes down in a recovery period'' - not up.
With the economy still mired in recession, private demand for credit is low, as both individuals and corporations postpone major borrowing. When recovery comes, loan demand will pick up. At that time a growing budget deficit could choke recovery, experts argue, because Treasury borrowings to finance the deficit might collide with private demand for capital, forcing up interest rates.
An unofficial coalition, cutting across partisan lines, is emerging in Washington, dedicated to the proposition that structural elements of the budget must be brought under control before they grow to the dimensions suggested by Kudlow and others.
Grouped around this consensus are senior White House and Treasury officials, Republican leaders in the Senate, and key Democrats in the House. This does not mean that they convene as a group, but rather that they focus similarly on the problem.
Cutting the structural deficit involves tough, unpleasant choices - increasing taxes to boost revenues and trimming the growth rate of social security and other entitlement outlays.
Allied to this is the need to cut the growth rate of military spending. Defense Secretary Caspar W. Weinberger, prodded by White House aides to produce some cuts, says he will propose to the President about $8 billion worth of savings in fiscal 1984, beginning Oct. 1.
''You really want to take that long-term look,'' says a senior congressional source. ''Where do you want the budget to be in 1987-88? Then take the initial steps now - get your policies in place.''
One such step, just presented to the President, would be a contingency package of tax increases, to go into effect in 1985 and later - if the budget deficit continues to grow.