The government has closed its books on fiscal 1984. It was $175.3 billion overdrawn, as we would say if we were talking about our personal checking account balances.
That figure is no surprise, of course, although it is somewhat higher than a few analysts thought it would be. At the end of August the deficit stood at $ 192 billion. September is a highly positive month, with quarterly income tax installments being due. Some observers thought the Reagan administration might be holding back something, so that the voters could be given a deficit in the area of only $170 billion for the year. As it turned out, the actual figure was close to the estimate made many months ago.
Since the all-time record deficit in fiscal '83 - $195 billion - some progress has been made. But this has also been a year of an exceptionally strong economy. Thus, Treasury Secretary Donald Regan's estimate that normal growth can continue to reduce the deficit by $30 billion or so a year looks overly optimistic.
Secretary Regan has consistently maintained that the deficit is not responsible for high interest rates. This claim sounds ridiculous to most economists. If the government, which is by definition the borrower with the highest credit rating, is a hog in the marketplace, it either crowds out other borrowers or causes interest rates to rise. When interest rates are higher, they attract more savings into the total savings pool and do not actually crowd out those borrowers who can afford to pay them.
The savings pool in the United States has been increased during the Reagan years by the attraction of foreign capital. In the long term, this is not a solution. Cessation of the flow of foreign capital into the US would put pressure on interest rates.
Mr. Regan is right to a point, however. Inflationary expectations also flow into the interest-rate structure. Until recently, the markets believed inflation was not licked. That attitude is now being tested. The slowdown in the economy to a 2.7 percent growth rate in the third quarter means relatively less demand for credit. Interest rates have already backed off some. Sales of homes in September, though slightly below August, seemed to be reacting positively to easing of mortgage interest rates.
More important, new signs of oil price weakness, coming after two years of economic recovery, indicate that another round of energy inflation is a long way off. Britain joined Norway in lowering its crude oil price, and Nigeria for the moment has bolted the price unity of OPEC by joining Britain and Norway.
If the markets become convinced that inflation is really beaten, or is at least likely to remain at 5 percent or less, the interest rate structure could adjust downward - even in the face of high US deficits.
A few economists, and not all of them supply-siders, are beginning to say that the deficit will gradually take care of itself. If President Reagan returns to the White House with an even more conservative Congress, it's possible that more progress could be made in trimming domestic spending in 1985. One week before the election, major changes in the makeup of Congress do not appear likely, however.
Averaging $30 billion a year in deficit cuts - given a growth recession in either 1985 or '86 - seems unlikely. Unless, that is, the government moves in more than a nominal way to raise taxes in '85. Next year, incidentally, is the only year in the next four in which a tax increase is politically feasible. Thus the domestic agenda for '85 seems bound to revolve around this issue of taxes and the deficit.