Slump Would Clobber A Balanced Budget
RECESSION, which could happen, would wipe out the Republican goal of a balanced budget by 2002.Skip to next paragraph
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For weeks now, the Senate and the House have struggled over an outline for $1 trillion in spending reductions in the next seven years to achieve that goal. By fall when congressional committees and the White House have hammered out budget details, the actual program reductions could shrink to between $600 billion and $700 billion, guesses Stanley Collender, the budget expert in Washington for the accounting firm Price Waterhouse.
Though that might look to the public like a failure, it would still be a ''monumental achievement,'' Mr. Collender says.
If an economic slump occurs, it will rapidly cut into revenue from personal and corporate incomes taxes and social security taxes, and add to spending on Medicare and Medicaid, social security, welfare, and unemployment insurance.
A Congressional Budget Office economist calculates that a mild recession, reducing national output by 1 percent from what it would otherwise be, would add $472 billion to the deficit over the next six years. Add a seventh year, and the cost of the recession would be about $650 billion to $700 billion, estimates Collender. That about offsets likely spending cuts; a deficit would continue.
Statistics released this week indicate that the slowdown in the $7 trillion United States economy continues. Orders to factories for big-ticket durable goods tumbled 4 percent in April, the third straight monthly decline. Industrial production has been down for two months. The volume of retail sales has been flat since last September. Housing starts and auto sales have declined dramatically from their peak.
''I am not sanguine,'' says Lacy Hunt, chief economist for HSBC Securities, a New York financial firm. He places the odds that the economy is already entering a recession at 45 percent.
If there is a downturn, the Federal Reserve should quickly adopt an easier monetary policy, Mr. Hunt says. Fed chairman Alan Greenspan promised in a speech this week that the Fed would lower interest rates to offset any fiscal drag on the economy should Washington agree on substantial spending cuts.
The earlier forward thrust of the economy and the Clinton administration's 1993 package of tax hikes and spending cuts already has trimmed sharply the federal deficit. In the seven months through April of fiscal 1995, the deficit was $94.3 billion, compared with $132.7 billion for the same period a year ago.
Cynthia Latta, an economist with DRI/McGraw-Hill, a Lexington, Mass., consulting firm, projects a deficit for fiscal 1995 of $170 billion. Clinton's budget experts forecast a $192.5 billion deficit, down from $203.4 billion in fiscal 1994 and a record $290.4 billion in fiscal 1992. But with rising health-care costs, the deficit was expected to start growing again next fiscal year.
The Republican budget blueprints call for a slowdown in the growth in Medicare costs anywhere from $256 billion (Senate) to $283 billion (House) over the next seven years, despite the political cost. Ms. Latta suspects actual Medicare cuts will eventually be smaller because of objections by older voters.
If the Republicans should succeed in getting a balanced budget -- and it is a big ''if'' -- federal outlays would have shrunk by 2002 to about 19 percent of projected gross domestic product, the total output of goods and services, according to the Senate budget blueprint. Under the House version, which includes sizable tax cuts, the comparable number would be 18 percent, calculates Paul Kasriel, an economist with Northern Trust Company in Chicago. That compares with 22 percent in fiscal 1994.
Though such percentage changes may seem small, they would be significant in terms of trends and federal programs. Real growth in federal outlays between now and 2002 would run about 3.2 percent a year, compared with projections of 4.7 percent and actual growth of 3.9 percent a year in the last four fiscal years and 10 percent a year in the 25 years before that.
But budget predictions often miss the mark by large amounts, the experts note. They are ''good for six months,'' says Collender. Seven-year budget forecasts are ''virtually impossible.''
And Latta doubts the budget will be balanced by 2002, even without a recession. ''People will have forgotten by then that is what they wanted to do,'' she says.