Reagan's '85 budget: optimism plus realism

The Reagan administration's fiscal 1985 budget offers a generally optimistic view of the United States economy and of government finances - heavily seasoned with political realism.

The budget takes a more upbeat view than do many private economists of how the economy will perform in coming years and of how long Washington can safely postpone action on reducing the deficit.

And the administration's proposals also assume Congress will be more willing this year than it was in 1983 to grant major increases in defense spending.

Of course, budget forecasting with the aid of rose-colored glasses is a time-honored tradition in both political parties. Election year budgets ''are partly forecasting and partly hope and aspiration,'' says Donald H. Straszheim, vice-president of Wharton Econometric Forecasting Associates.

The President's budget also exhibits some hard-headed political realism. For example, the social-spending cuts advanced this election year are much smaller than in previous Reagan administration budgets. And the total revenue additions and spending cuts the budget proposes are vastly below what would be required to eliminate the deficit. It is clear that ''big sweeping changes are not feasible or likely to happen in this Congress,'' says Budget Director David A. Stockman.

The President seems to have abandoned his call for a mix of $3 in spending cuts for every $1 in tax hikes in attempts to trim the deficit. The budget calls for $33.7 billion in tax boosts over three years, while suggesting only $26.2 billion in nondefense spending trims.

The fiscal 1985 budget that the President sent to Congress Wednesday:

* Calls for spending $925.5 billion, up $71.7 billion, or 8.4 percent, from 1984.

* Projects revenues of $745.1 billion, up $75 billion, or 11.2 percent, from 1984.

* Seeks $7.9 billion in new taxes, including levies on certain employer-paid health insurance premiums and steps to curtail tax shelters.

* Estimates a deficit of $180.4 billion, a reduction of $3.3 billion, or 1.8 percent, from 1984.

* Advocates spending $305 billion on defense, an inflation-adjusted increase of 13 percent.

* Proposes nondefense-program spending of $545.0 billion, a reduction of $4.6 billion, or 0.8 percent - much smaller than the cutbacks the administration called for in previous years. The biggest cuts would come in low-income benefit porograms like food stamps and medicaid.

* Shows the cost of servicing the national debt will be $116.1 billion in 1985, up $7.9 billion over 1984 levels. And the '84 costs, after adjustment for inflation, were triple those in 1971.

All budgets are based on assumptions about how the economy will affect the government's income and need to spend.

The President's budget assumes the economy will grow at an inflation-adjusted rate of 4.5 percent in 1984 and 4 percent in each of the following four years.

At the same time, interest rates (as measured by the rate on 91-day Treasury bills) are expected to average 8.5 percent this year and decline steadily for the next four years.

''I am very optimistic and I know the President shares this optimism,'' says Treasury Secretary Donald T. Regan.

Most, but not all, private forecasters think the economy will slow in 1985 and '86 and interest rates will rise.

''The economic assumptions in the budget are quite heroic,'' says Robert Gough, senior vice-president at Data Resources Inc.

The assumptions are ''very favorable but not unreasonable on the basis of past experience,'' Council of Economic Advisers Chairman Martin Feldstein says.

If the administration's assumptions are too bullish, the government's deficit will be larger than the budget now forecasts. The budget predicts deficits in the $180 billion range through 1987, although they decline slightly as a percentage of gross national product.

By contrast, Wharton Econometrics sees the deficit growing to about $190 billion in 1985 and $221 billion in '86.

Forecasters worry that Reagan's plans involve a significant degree of risk. Higher deficits could force interest rates to rise, thus slowing the economy, they say. A higher deficit also would add to value of the dollar, relative to other currencies, thus making it difficult for US companies to export their products.

''We have already waited too long'' to trim the deficit, says Ben E. Laden, chief economist at T. Rowe Price Associates. He adds that the US faces interest-rate and inflation problems as a result.

Supply-side economists say the President is following the correct course in waiting to take major deficit trimming action until after the election, while proposing bipartisan agreement on a $100 billion deficit down payment, over three years, in the meantime.

Is it too risky to wait for major deficit-slashing action? ''Not compared to the alternatives,'' argues Alan Reynolds, chief economist at Polyconomics Inc., an economic consulting company. He says those alternatives include raising the tax rate on the last dollar of income earned or imposing an energy surtax.

''You can always build a scenario for disaster. I can conceive of such a thing (but) I think it is unlikely,'' adds Richard Rahn, chief economist at the US Chamber of Commerce.

Economists generally feel that the $100 billion down payment on the deficit would ease the financial markets' worries about the problem. But economist Gough of Data Resources says additional deficit reductions must come close on the heels of the down payment.

Mr. Stockman estimates that of the $100 billion target, only $20 billion will take effect in fiscal 1985. ''What we are going to have to do in the future will be very difficult - there will be tough bullets to bite,'' he says.

The stimulative fiscal policy suggested in the President's budget will continue to make life difficult for the Federal Reserve Board, economists say.

To offset the inflationary effects of high government spending, the Fed will probably have to keep a relatively tight grip on credit.

''As a result, interest rates will be higher than they have been in the past, and the Fed will be blamed. But in fact it is fiscal policy which is the root of the problem,'' Mr. Laden says.

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