A talk with CBO's Penner: upbeat outlook for fiscal '84
Washington — The politically charged debate over the best way to reduce the federal deficit will heat up next week. The Reagan administration and the Congressional Budget Office (CBO) are scheduled to release revised economic forecasts - including those for the deficit.
A key participant in the debate will be CBO director Rudolph G. Penner. The CBO is an arm of Congress that provides legislators with independent analysis of the economic forecasts and budget estimates generated by President Reagan's much larger staff of economists and budget officials.
Mr. Penner, a Republican and former fiscal policy expert for the American Enterprise Institute, a conservative public policy research organization in Washington, discussed the budget and economic outlook in a Monitor interview earlier this week. He offered a relatively optimistic view of the nation's economic prospects and said that the CBO would lower its budget deficit forecast. He said he no longer rules out the possibility that the US will grow its way out of large federal budget deficits.
Approaches for shrinking the deficit already are at the heart of the battle for the White House. Democratic candidiate Walter F. Mondale says a tax boost will be needed, along with spending cuts. His staff is updating a tax plan Mr. Mondale first unveiled during the Democratic primaries.
President Reagan says he has no plans for a tax cut, but he adds that a tax hike might be needed if the budget were still out of balance after spending has been cut as much as possible.
A no-tax-hike plank is now being considered for the Republican platform, although some Republicans, like Senate Finance chairman Robert Dole of Kansas, argue that additional tax revenue will be needed.
Penner, a softspoken transplanted Canadian with a ready laugh, will supply key information to be used in the debate. In an office decorated with momentos of weekends spent sailing, the CBO director said:
* The economy will be stronger in 1984 than the 5.4 percent growth the CBO forecasted in February. Growth will drop off - but not disappear - in 1985. ''In crude terms'' a prediction of 7.4 percent inflation-adjusted growth in 1984 and 3.2 percent in 1985 would be about right, he says. However, he warned that the economy is somewhat unpredictable and that his forecast could be overtaken by events.
* Less pessimism about future levels of interest rates is justified. If the economy performs as expected this year and next, it ''could ease pressure on interest rates,'' he says.
Still, rates this year and next will be higher than CBO originally forecast. The CBO's February estimate for the interest rate on Treasury bills in 1985 was 8.6 percent. On Wednesday, 90-day T-bills closed at 10.45 percent.
As a result of higher rates, the government's interest payments on the federal debt will be higher than CBO's earlier estimate of $108 billion for fiscal year 1984.
* The CBO will make modest reductions in its deficit estimate for fiscal 1984 and future years because of faster economic growth, sharper reductions in unemployment, and slower federal spending than originally expected. After accounting for the tax bill signed into law last month, the 1984 deficit recently has been estimated at around $175 billion vs. the CBO's February estimate of $190 billion. ''It is not going to be $150 billion,'' Penner says.
The Office of Management and Budget's revised budget is widely expected to show a 1984 deficit in the $170 billion to $175 billion range.
The deficit down payment Congress made earlier this year is large enough so that he no longer dismisses out of hand, as he did earlier this year, the argument made by Mr. Reagan and others that the US could grow its way out of the deficit.
Such a result still is implausible and ''certainly not an assumption I would make for planning purposes,'' he said.
There is little support in economic history, Penner adds, for the President's argument that raising taxes before making major spending cuts inevitably leads to increased spending.
''That does not mean it might not happen,'' he cautions. And the widespread belief in the theory has to be considered in drafting budget-cutting plans if they are to have a chance of clearing Congress, he says.
It is theoretically possible that the deficit problem could be solved solely by cutting spending, Penner says. But ''it is hard to imagine that happening without at least considerably slowing'' the growth of major programs in the budget. He noted that three-fourths of government spending in fiscal 1987 will be devoted to defense, social security, medicare, medicaid, and interest on the federal debt.
A national sales tax, now gaining popularity in Congress, is neither as big a revenue raiser nor as unfair to persons of modest means as some think, Penner says. Exemptions and exclusions are likely to be added, reducing the revenue gain, he says. And government programs and fluctuations in spending patterns over a person's lifetime are likely make a sales tax fall less heavily on the poor than it might first appear.
After almost a year in the job, Penner gets fairly high marks both from private economists and congressional staff members involved in the budget process.
''He seems to be doing a very good job,'' says a forecaster from a major economic consulting company who has had contact with Penner.
A Democratic source involved in the House budget process adds that there have been no complaints of bias in the CBO's studies since Penner took over from the CBO's widely respected first director, Alice Rivlin. But this source added that the CBO's coming forecast is ''more upbeat'' than it should be.
The fact that CBO's performance has not deteriorated is not surprising. Penner said he was ''delighted'' with the staff and organization he inherited. So except for filling certain key vacancies, he says he has made ''no real changes of any significance.''