'Supply side' economist bucks the tide of gloomy deficit forecasts
Boston — The federal budget deficit is shrinking rapidly. In about two years there should be practically no net government borrowing in the financial markets - taking account of state and local budget surpluses.
Those are the startling statements of Paul Craig Roberts, a former high Treasury economist in the Reagan administration and a ''supply sider'' - one who believes that sharp tax cuts will stimulate the economy sufficiently to bring in even more revenues eventually. That view is contrary to common views in Washington or the financial community.
Already, he notes, much more rapid economic growth than widely anticipated is sucking in more revenues.
''With pessimistic growth forecasts continuing to be wrong, the deficit forecasts will be wrong, too,'' he says.
Another economist, Edward Guay, of CIGNA insurance company's economics department, Hartford, Conn., agrees on the recent rapid decline in the size of the deficit.
But he is not so sure of this trend lasting beyond next winter.
For the time being, however, the deficit news has been surprisingly good. ''There are still people who talk as if the deficit is rising, and it has been declining for a year,'' notes Mr. Guay.
In January 1983, the President Reagan's budget for fiscal 1984 anticipated a deficit of $231 billion. By January 1984, that forecast for the year ending Sept. 30 had been lowered to just under $200 billion. In April, the Office of Management and Budget (OMB) knocked the forecast down further to $178 billion.
Now some forecasters, looking at revenue and spending figures on a monthly basis, have been talking about a deficit of around $150 billion.
Citibank economists, anticipating a step-up in defense spending and seeing a change for the worse in the monthly deficit pattern since February, forecast $ 174 billion for this year. CIGNA's Mr. Guay, though expecting both more defense spending and farm program outlays, nonethless forecasts a deficit of about $160 to $165 billion. The deficit in May rose to $33.93 billion, pushing the deficit for the first eight months of fiscal 1984 to $140.2 billion.
But both the OMB April forecast and many private deficit predictions have been based on an economy expected to grow at only a 3 or 3.5 percent annual rate this quarter.
Instead, the ''flash'' figure released last week showed gross national product rising at a speedy 5.7 percent rate. Moreover, the economy zoomed upward at a 9.7 percent rate in the first quarter, up from an earlier estimate of 8.8 percent.
Mr. Roberts charges administration officials with being ''too full of doomsaying'' in their forecasts for the economy.
Even a table of statistics he put together for an article in the latest Business Week magazine has been somewhat outdated by the flaming pace of the recovery. The OMB, he notes, in its April forecast had the deficit falling from by fiscal 1989. Those numbers ignore the ''down payment'' deficit-cutting package now before Congress. But considering the faster growth in the economy, they are possibly too high.
Then he subtracts the impact of the down payment from this basic deficit, starting with $25 billion in fiscal 1985. OMB figures take that down payment number up to $71 billion in 1987. Then he uses some previously unpublished Treasury estimates showing that by fiscal 1989, the basic deficit of $198 billion would be reduced by $119 billion through the tax hikes and spending cuts in the down payment package. That leaves a federal deficit of $79 billion. But if rapid growth continues, this deficit would be considerably smaller if not gone by then. Each quarter fast growth continues, the base for tax revenues is that much larger on a cumulative basis.
Next, Mr. Roberts takes some recent forecasts by the Council of Economic Advisers (CEA) of budget surpluses in state and local governments. These rise from $46 billion in fiscal 1985 to $64 billion in fiscal 1989.
These surpluses are subtracted from the federal deficit to get the total government deficit. Faster growth should also enlarge those state and local budget surpluses from the CEA forecast. That overall deficit, using the outdated economic assumptions and surplus forecasts, is thereby reduced to $15 billion or a small 0.3 percent of the budget by 1989.
Even by 1987, the combined deficit of all governments would be small compared to the size of the nation's capital markets, Mr. Roberts maintains. Thus any impact on interest rates would be minimal.
However, CIGNA's Mr. Guay offers some caveats to Mr. Roberts's optimistic forecasts.
First, he expects the cities and states to start spending more of their surplus funds on roads, sewers, and other needs.
Second, he holds that the down payment package in reality is worth only $40 to $60 billion of deficit reduction over three years, rather than the $150 billion trumpeted by Congress.
This, he explains, is because some of the spending cuts are ''more on paper than real.'' They are not spelled out in necessary detail or are planned for the future, and won't happen, he says.
Also, in the case of revenue measures that close tax loopholes, investors will simply shift to other unclosed loopholes, he figures.
Third, some of the tax changes of 1981 will continue to erode tax revenues, though Congress, in last week's tax package, tried to ease that problem somewhat. Effective tax shelters, notes Mr. Guay, are more widely available to individuals than ever before.
Roberts, now a professor of political economy at the Center for Strategic and International Studies at Georgetown University, figures the deficit could be wiped out even a year or so earlier than 1987 - without further measures to cut the deficit after the fall election - if the Federal Reserve System permits solid growth to continue.
He is worried, however, that the Fed will really ''slam on the brakes'' with tight monetary policy out of concern that rapid growth will accelerate inflation. Roberts maintains that because of changes in taxes or other aspects of the economy made during the Reagan administration, capacity will grow fast enough to dampen inflationary pressures. He points to the unusually rapid increase in capital spending in this recovery, and its ability to ignore high interest rates. The ''flash'' figures for the second quarter GNP, he notes, indicate inflation is ''collapsing.'' The GNP deflator, the broadest measure of inflation, increased at a 2.8 percent rate in the second quarter, down from 3.9 percent in the first quarter.
Most economists have been forecasting more rapid inflation as the year continues.
Roberts also uses fancier economic calculations of the budget deficit on a ''full-employment basis,'' a method that assumes the economy is running at a relatively low level of unemployment.
From this, he subtracts the impact of inflation on outstanding federal debt - it reduces the real burden of repayment. Then he concludes the federal budget nd moves into substantial surplus thereafter. With rapid growth continuing, balance could come even earlier, he says.
The accuracy of any such long-term budget forecasts depend not only on economic events, but on congressional decisions on taxes and spending.
At the moment, however, Roberts maintains that ''legions and legions'' of economists and officials are too gloomy about the deficit.
A more cautious Mr. Guay holds that once the current capital-spending boom peaks, probably in the winter of 1985, accelerated depreciation for equipment users and slower profit growth for producers of capital equipment could dampen the increase in government revenues. ''The deficit could become worse again,'' he says.