THE stock and foreign-exchange markets have been saying to President-elect George Bush, ``Read my lips. Cut the budget deficit!'' The situation hasn't changed from before the election. The fiscal 1988 deficit was $155 billion. This red ink has to fall to $110 billion by fiscal 1990, or a sequester of funds occurs under the Gramm-Rudman-Hollings legislation. In other words, if Congress doesn't cut the deficit by directly cutting spending or raising taxes, outlays are cut automatically across the board, with some exceptions, such as interest on debt and social security payments.
Since the numbers haven't changed, Lincoln Anderson, a former economist with the President's Council of Economic Advisers (CEA), speculates that the plunge in stock prices and the dollar after the election must be related to fear that sympathy in Congress and elsewhere is rising for a boost in taxes to trim the deficit.
But Mr. Anderson, now with Bear, Stearns & Co., doesn't believe that Mr. Bush will permit an increase in income tax rates or a broadening of the income tax base by closing major loopholes. He does suspect that revenues could be ``enhanced,'' as the Reagan-Bush administration at one time put it, by increases in ``user fees'' for government services and by higher ``sin taxes'' on liquor and tobacco (talked about in the last CEA annual report).
Further, Anderson believes that Congress could cut spending on transportation, energy, and agriculture programs.
As he promised in his campaign, Bush likely will not trim real defense spending in his budget proposals. But Anderson believes he will go along with some defense cuts imposed by Congress. Another Wall Street economist, Sam Nakagama, says that Bush ``will be helped enormously by the collapse of the cold war. It's significant that Mr. Bush's first Cabinet appointment was that of James Baker as secretary of state, with instructions to get together quickly for [Soviet] Foreign Minister Shevardnadze to arrange a Bush-Gorbachev summit meeting.''
Mr. Nakagama suggests that the Bush administration will be shifting emphasis in arms control from strategic missiles to conventional forces. The latter are far more costly than nuclear weapons and thus offer much greater potential for budget savings.
Whether the deficit would come down by itself without congressional action is still debated by economists. Alan Greenspan, chairman of the Federal Reserve Board, told the National Economic Commission last week that the US economy has so little slack that it can't grow fast enough to eliminate the deficit, that politicians should concentrate on reducing the deficit directly ``and not hoping it will go away.'' Failure to rescue the deficit ``courts a dangerous corrosion of our economy,'' he added.
The huge losses run up by the Federal Savings and Loan Insurance Corporation as it rescues thrifts from bankruptcy make it harder to outgrow the deficit. These losses were one reason federal spending grew 6 percent in fiscal 1988, more than expected.
Bush, who headed a Financial Market Deregulation and Reform task force in 1984-85, is well boned up on problems of savings-and-loan associations and could push for cost-saving reforms in this area.
In relation to the size of the economy, the budget deficit is not huge - about 3 percent today, compared with 5 percent in 1986. ``I don't consider it a serious economic problem when the deficit is falling,'' says Anderson. But it must be kept on that path.