Role of government under Reagan, Thatcher has actually grown

One of the major ironies of today's economic scene is that both President Reagan and Prime Minister Margaret Thatcher, although each is conservative and verbally dedicated to reducing the role of government in the economy, has actually done the contrary.

Before this decade, government outlays in the United States as a percentage of gross national product (the total output of goods and services) had reached their highest post-World War II point in 1976, when they amounted to 22.2 percent.

But such outlays reached 26.3 percent in the fiscal year ending Sept. 30, 1983 - almost three years into Mr. Reagan's term. In the current year, fiscal 1984, that figure will drop to about 24.2 percent, according to the latest estimate of Dr. Michael E. Levy, director of economic policy research at the Conference Board in New York. And in fiscal 1985, Dr. Levy guesses, government spending will still be equal to 23.8 percent of GNP.

The administration's official numbers will come out Feb. 1 when President Reagan presents his fiscal 1985 budget to Congress.

Undoubtedly, government spending will remain a higher proportion of national output than it would have under President Carter's last budget plans, and, for that matter, higher than in any pre-Reagan postwar year. The comparable figure for 1981 was 22.9 percent and for 1980, 22.4 percent.

What's happened is that any gains from the much-publicized cuts in government spending on civilian needs have been more than offset by rapidly stepped-up defense spending and sharp reductions in taxes. Adding to the problem has been the growth of ''entitlements'' (social security, medicaid, medicare, etc.) and of debt-service charges. Martin Feldstein, chairman of the President's Council of Economic Advisers, has estimated that even with a large drop in interest rates, continuing huge deficits could mean an increase in net interest paid by the federal government from 2 percent of GNP in 1980 to 3 percent in 1988.

With federal receipts (taxes and other income) equal to only 20.4 percent of GNP in fiscal 1983, the deficit amounted to 5.8 percent of GNP.

In the current fiscal year, according to estimates by Dr. Levy, receipts will be equivalent to 18.9 percent of GNP and the deficit equal to 5.3 percent. (In dollar numbers, his estimates are $659.7 billion in receipts, $848.5 billion in outlays, and a deficit of $188.8 billion, just under last year's $195 billion deficit.) Spending will be higher than the original government estimate, but revenues will also be greater because of more rapid growth in the economy than anticipated, Dr. Levy says.

For fiscal 1985 - the budget soon to be announced - Dr. Levy guesses that receipts will be $735 billion, outlays $925 billion, and the deficit $190 billion, or 4.9 percent of GNP. Receipts might be higher if the government included some ''revenue enhancements'' in the budget, the Conference Board economist noted.

The latest budget leaks from Washington indicate that if President Reagan does accept any of the tax increases being proposed by his advisers, those suggestions will have to be small.

Here the Reagan administration differs sharply from the Thatcher government in the United Kingdom. There, taxation as a proportion of the national product has gone from 33.9 percent in 1978 to 39.1 percent in 1982, the last year for which figures are available. This, notes Samuel Brittan of London's Financial Times, is ''probably the largest increase in the tax burden in British peacetime history.''

Mrs. Thatcher needed the money to finance rising expenditures and decrease the government deficit (public borrowing requirement) as a proportion of national product.

By contrast, under President Reagan, federal taxes have dropped by some 2 or 3 percent as a percentage of GNP. In real terms, personal taxes have dropped modestly and corporate taxes sharply. As a result, the deficit is far higher in numbers and as a percentage of GNP than in previous postwar years.

How could Prime Minister Thatcher's government be reelected so triumphantly after such a huge tax increase?

Beside the Falklands war euphoria, Mrs. Thatcher had the benefit of rising North Sea oil revenues. Of the 5.2 percent increase in the tax take between 1978 and 1982, some 2.9 percent was accounted for by oil receipts. The government got a further 1.2 percent of national output by boosting national insurance contributions (similar to US social security taxes), tax increases which have less political impact than higher taxes on incomes or a raised value-added tax on what people buy.

President Reagan is getting the revenue benefits from faster economic growth, but that's not sufficient to wipe out the deficit. Nor, apparently, does he feel sufficiently politically secure to propose major tax hikes. Nor is he likely to call for further cuts in domestic programs, because of the damaging political impact.

Dr. Feldstein has noted that social security spending ''exploded'' from 2.2 percent of GNP in fiscal year 1960 to 5.3 percent in fiscal 1983, but spending on all other domestic programs has shrunk from 9.3 percent of GNP in 1980 to 7.7 percent in the current fiscal year, a decline of one-sixth. This proportion should drop to 6.9 percent by fiscal 1986 under current law, the same share in the late 1960s.

Considering this drop in domestic program spending, if President Reagan or Congress has real ambitions to cut the size of government, they will have to take a second look at the Defense Department's proposal for a fiscal 1985 budget of $305 billion, up 17 percent from this year.

You've read  of  free articles. Subscribe to continue.
QR Code to Role of government under Reagan, Thatcher has actually grown
Read this article in
QR Code to Subscription page
Start your subscription today