Congress losing inflation's help in overspending habit
Washington — When people spend more money than they earn, usually it catches up with them sooner or later. But for 20 years or so, Congress has had a couple of allies to repeatedly rescue it from trouble when it spent more than the taxpayers were sending to Washington: inflation and its partner known as ''bracket creep.'' However, that help may soon be gone, as inflation comes down and bracket creep disappears, to economists' approval.
This approval could be clearly seen here this week as many of them gathered for the annual meeting of the American Economic Association.
Bracket creep occurs when inflation pushes individuals' income into higher tax brackets. As this happens, the progressive structure of the tax system has meant that federal revenues rise even faster. A 1 percent increase in personal incomes meant a 1.6 percent rise in federal revenues as individuals moved into higher tax brackets.
That was, in some ways, great for the politicians. If inflation worsened, government revenues went up still faster. Every few years, Congress could cut nominal taxes and claim credit on the campaign trail. They didn't have to vote for tax boosts; they just happened as incomes went up.
Unfortunately, the economists noted, the increased tax burden produced a related phenomenon known as ''fiscal drag,'' which slows the economy more than desired.
Thus, Alice M. Rivlin, director of the Congressional Budget Office, prompted no mourning when she said before a symposium at the association's meeting: ''Ladies and gentlemen, fiscal drag is dead.''
It did not die of natural causes, another panelist at the symposium on the federal budget and tax policy noted; it was killed by the Reagan administration and Congress.
The big tax bill of a few months back cuts personal tax rates some 25 percent by 1983. That is not a cut in the real tax burden, however, as Harvard University economist Martin Feldstein noted and President Reagan has acknowledged.
Dr. Feldstein explained that because of the timing of the staged tax cuts, the actual reduction in nominal taxes amounts to about 23 percent. Further, if current dollar incomes rise about 10 percent per year over the next four years, by 1984 the real tax burden would have gone up some 24 percent in that time. So the tax cuts are approximately canceled by bracket creep.
After that, the tax system is ''indexed'' so that the brackets move up along with inflation. And fiscal drag is truly dead.
This means, warned Mrs. Rivlin, peering through a hydra-head of microphones, that federal deficits in the future will get bigger nominally (in dollar terms). It will also take up a bigger percentage of gross national product (GNP), that is, the nation's total output of goods and services, unless Congress cuts spending or boosts revenues, she said.
''This is a new fiscal situation,'' she said.
Congress can no longer rely on bracket creep to rescue it from overspending. Nor can it count on a decline in defense spending as a proportion of the budget or of GNP to provide more money for the civilian side. The Reagan administration wants a 7 percent per year increase in real terms in defense spending.
She figures the deficit for the current fiscal year, 1982, will be about $100 billion, which is higher than anticipated because of the recession. And it will get worse in fiscal 1983 unless Congress takes ''quite drastic action before the election and before the end of fiscal 1982 (Sept. 30, 1981).
''More cuts will be difficult, she said. That is because many of them will have to come from spending on ''people'' programs, already cut sharply, rather than defense.
A ''major share of time and effort'' is being put now into budget cuts, noted another panelist, Murray F. Weidenbaum, chairman of President Reagan's Council of Economic Advisers.
Charles L. Schultze, chairman of the Council of Economic Advisers under President Carter, had some suggestions for Mr. Weidenbaum -- ''ways that shouldn't hit anybody's ideology all that badly,'' he said. Impose a windfall profits tax on decontrolled natural gas prices. This should produce an extra $15 or $20 billion in revenues by 1984. Postpone the last 10 percent of the personal income tax cut, raising another $17 billion. Close some $10 billion in tax loopholes. Trim the planned increase in defense spending by $10 or $13 billion. Cut some $10 billion from ''entitlement programs,'' such as social security. Find another $5 to $10 billion of cuts in the remainder of the budget.
These cuts add up to $67 billion to $80 billion, he noted. They would trim the expected fiscal 1984 budget deficit by the equivalent of 1 percent of GNP. Otherwise, the deficit will grow to some $160 to $190 billion or some 2.7 percent of GNP -- high for the period of high employment anticipated for 1984.
Mr. Schultze spoke of the budget deficits as a ''serious problem'' but ''not a catastrophe.'' This description about matched that of Mr. Weidenbaum when he explained why ''deficits do matter'' but ''are not the most important thing in the economy.''
The administration will make its budget proposals to Congress in a few weeks. Mr. Weidenbaum made it clear, however, that the Reagan administration will not, as he put it, ''push the proverbial panic button'' as past administrations, both Republican and Democratic, have when the nation was hit by a recession. The Reagan administration, he said, will not take such ''counterproductive measures'' as increasing government spending beyond that provided for by automatic stabilizers (such as increases in unemployment insurance payments and welfare). Nor would it push quick enactment of tax cuts designed to boost consumer spending or encourage the Federal Reserve System to ease money policy.