Economists hoist red flags as US deficit projections rise
Holiday shoppers are not alone if they find their debts rising more rapidly than expected. In recent days the Reagan administration and the Congressional Budget Office (CBO) have looked at the federal government's finances and found budget deficits in coming years will be even worse then previously forecast.Skip to next paragraph
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The administration's estimate for fiscal 1985 has jumped $20 billion to $190 billion since July. And the CBO has boosted its estimate for the deficit in budget year 1986 by $51 billion since last August to $197 billion. Without action in the meantime, by fiscal 1989 the deficit could hit $280 billion, the CBO says.
Faced with a steady stream of bad budget news, most participants in the debate over deficits now agree increased taxes will probably have to be one element in any effective remedy. The Reagan administration appears to be the latest reluctant convert to the need for higher taxes.
At a meeting with reporters Monday, Treasury Secretary Donald T. Regan said the administration's fiscal 1985 budget, due in January, will contain ''a tax proposal of some type that will be contingent on getting spending cuts,'' from Congress. A similar contingency tax was included in last year's budget, but the President cooled on the idea as the year went on.
He still has not made up his mind, according to press secretary Larry Speakes. Treasury Secretary ''Regan was speaking for Regan,'' Mr. Speakes says. ''The President has not made a decision.''
The latest estimates of the deficits' sizes have reinforced the widespread belief among economists that neither economic growth nor spending cuts alone will free the nation from its budget bind.
''We can't just sit back and watch it go away,'' as a result of a reviving economy pushing up government income, says Lawrence Klein, economics professor at the University of Pennsylvania. One reason is that at the moment, the cost of paying interest on the federal debt is projected to rise at a faster rate than our national income. And recent cuts in federal tax rates have reduced the windfall the governmen gets from an improving economy.
And to balance the budget with spending cuts ''you are talking about between a 20 and 25 percent cut in everything,'' in the federal budget, says CBO director Rudolph G. Penner.
Of course, trimming the deficit by tax hikes alone also would be financially painful. An across-the-board tax hike of 25 to 30 percent would be needed, Mr. Penner estimates.
There is still no political consensus between Congress and the White House over the specifics of a deficit cutting package. In fact, Senate Finance Committee chairman Robert Dole (R) of Kansas argues, ''There is a real danger of political stalemate in the coming year over the budget issue,'' especially since the President, along with many members of Congress, will be running for reelection.
''How many candidates are going to run (in 1984) on a platform of raising taxes or reducing entitlements? '' asks Finance Committee member John C. Danforth (R) of Missouri.
Spending cuts will be particularly difficult because the bulk of any savings would have to come from relatively few programs. Defense, entitlements like social security and medicare, and interest on the debt, accounted for 86 percent of federal spending in fiscal 1983 and will consume an estimated 88 percent by 1989. Just social security, medicaid, and medicare made up 63 percent of all entitlements in 1983 and will grow to 73 percent by 1989.
''It seems reasonable to believe that major changes in defense, social security or medicare will be required if the course of total spending is to be altered significantly,'' Mr. Penner says.
In an effort to prod Washington into action, 17 economists are parading before the Senate Finance Committee this week to testify on the dangers of deficits in the midst of an economic recovery.
''Deficits pose a very major threat to the economic well being,'' of the nation, says Harvard University economics Prof. Benjamin M. Friedman, voicing a widely shared sentiment.
Estimating the deficit's impact on an average citizen is difficult. The numbers involved are so large that the deficit ''is a metaphysical concept,'' Penner notes.
By one measure, the public debt now stands at $6,000 for every citizen and if no action is taken each person's share of the debt will grow to $10,000 over the next five years, Senator Dole estimates.
But the impact on citizens goes beyond a growing debt load.
For example, by nudging up interest rates, the deficit has made the dollar a more attractive investment to foreigners, thus increasing the dollar's value. A high-priced dollar, in turn, adds to the price of US goods, making it difficult to sell them abroad.
By late 1984, ''over 2 million jobs will have been lost as a result of the deterioration in the trade balance,'' since 1983 began, according to C. Fred Bergsten, director of the Institute for International Ecomomics.
Without corrective action, he warns, trade deficits could grow from their current $100-billion level to $200 billion annually later in the decade.
''The associated job loss would exceed 4 million,'' he says.
One way or the other, concludes Allan Meltzer, economic professor at Carnegie-Mellon University, ''What the government spends, the public pays for.''