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White House shaves deficit forecast. OMB scans economic horizon and trims '85 shortfall by $8.9 billion

By David T. CookStaff writer of The Christian Science Monitor / April 16, 1985



Washington

Predicting the United States government's budget deficit is somewhat like guessing how big your raise will be before the boss delivers the news: You know the general situation, but your estimate can be optimistic or pessimistic. Deficit forecasts ``are subject to very large changes, depending on your assumptions about changes in the economy,'' says David Berson of Wharton Econometric Forecasting Associates.

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The Office of Management and Budget (OMB) released its revised predictions for economic activity and the federal deficit Monday. The administration shaved its deficit forecasts for fiscal 1985-88; the 1985 deficit is estimated to be $8.9 billion less than projected in February. The estimate for '86 is $2.6 billion less. OMB trimmed its economic growth forecast for '85, but to a level still above that of many private estimates. It also cut its inflation forecast and left unchanged a projection that interest rates will trend steadily down through 1990.

A number of private forecasters say the estimates -- particularly those for economic growth, the course of interest rates, and the deficit -- err on the side of optimism.

``The whole forecast is optimistic,'' says Bernard Markstein III of Chase Econometrics.

Some private forecasters also say White House aides and Senate Budget Committee Republicans were wearing rose-colored glasses when they figured the potential deficit reductions in the budget plan scheduled to come to the Senate floor April 22. The OMB numbers released Monday did not include the impact of the plan now pending in the Senate, which claims savings of $51.9 billion in fiscal 1986 and three-year savings of $296.8 billion.

``The publicized number of $51 billion in budget outlay savings in 1986 is too high by about $16 billion,'' according to a study published by Lawrence Kudlow & Associates. Mr. Kudlow was chief OMB economist in the first Reagan administration. He says the Senate plan overestimates deficit reduction, because it uses an inflated base line to figure the savings on defense spending.

Two factors may prove crucial to the success in the Senate of the budget plan hammered out by Senate GOP leaders and the White House: the size of the savings, and the plan's perceived effect on the 1986 elections. The plan outlines a number of politically painful steps on the road to deficit reduction, including a limit on social security cost-of-living increases, reduced farm aid, elimination of Amtrak subsidies, and limits on student loans.

OMB director David A. Stockman admitted Sunday that ``it's very tough'' for senators to vote for such a plan. But Monday he predicted on the ``CBS Morning News'' that in the debate ``members will discover there isn't really that much of an alternative'' to the domestic cuts if the deficit is to be reduced.

Mr. Stockman argued that defense spending has already been cut ``back to the bone'' and added that further reductions in the Pentagon's budget would not reverse planned domestic-spending cuts.

The economy will be imperiled if the deficit is not cut, Stockman contends, adding that the only alternative to spending cuts is ``a whopping-big tax increase.''

Leaders in the Democratic-controlled House of Representatives plan to let the Republican-controlled Senate take the lead in making tough budget cuts. House Budget Committee chairman William H. Gray (D) of Pennsylvania said in a published interview that ``no way'' would the Senate plan clear the House.

Citing increased tax collections, slightly lower-than-expected federal spending, and changed economic conditions, the OMB cut the deficit estimate for fiscal 1985 from $222.2 billion to $213.3 billion. The '86 deficit estimate was trimmed from $180.0 billion to $177.4 billion.

OMB shaved its forecast for inflation-adjusted economic growth in calendar 1985 to 3.8 percent, vs. 3.9 percent when the budget was released in February. Its growth forecast for '86 rose to 4.1 percent from 4.0 percent. Chase Econometrics, by contrast, expects growth of 3.1 percent in '85 and 2.2 percent in '86.

The administration left unchanged its projection that the interest rate on 91-day Treasury bills would fall from an average 8.1 percent in 1985 to 7.9 percent in '86 and to 5.0 percent by '90. Wharton expects the economy to slow much more sharply than the administration and thus predicts average T-bill rates of 8.3 percent in '85 and 8.2 percent in '86. If economic growth were as strong as the administration expects, ``we would have higher interest rates,'' Wharton's Mr. Berson notes.