All of us, as individuals or families, make assumptions on which we base our future economic planning. So does the federal government, and that is where the budget tangle begins.
Budget planning takes so far in advance that no one can be sure how the vast US economy will perform in a future budget year.
Right now, for example, the Office of Management and Budget (OMB), the budget arm of the White House, is preparing "target letters" to send to Cabinet secretaries and other agency heads telling them how much they can expect to spend in fiscal 1983.
1983? At a time when the final results of 1981 are not yeat in place and debate rages over how much more may have to be cut from the 1982 budget?
How can anyone rationally plan ahead to 1983 without knowing how high inflation will be, how many Americans will be jobless, how briskly (if at all) the economy may be growing, and where interest rates will stand?
The answer is that no one can rationally plan so far ahead. Yet President Reagan, by law, must present his 1983 budget to Congress next January, only five months from now.
So the experts at OMB, with the help of whirring computers, make the best guesses they can, extrapolating from what the economy is doing now. These guesses are dignified by being called "assumptions."
The White House, in its latest projection, assumes that consumer prices will climb 5.7 percent in calendar 1983, that the economy will grow by 5 percent. that unemployment will average 6.6 percent, and that the interest rate on 91-day Treasury bills will be 7.5 percent.
Right now, by contrast, inflation runs at about a 9 percent annual rate, the economy is not growing at all unemployment is 7.0 percent, and Treasury bills are paying more than 15 percent.
In other words, those White House assumptions on which 1983 budget planning now is based are pretty optimistic. A White House document admits that these figures "are simply projections of the trend of economic performance expected under the administration's new economic policy."
But the White House is not the only federal agency involved in budget planning. Congress, through the Congressional Budget Office (CBO), also studies the economy, draws its own conclusions, and applies them to the budget that the President sends up.
Then the fur begins to fly, as now is the case over the 1982 budget, because the CBO and White House seldom agree on economic assumptions.
The CBO, reading its own set of tea leaves, contends that the 1982 budget deficit will be $15 billion or so higher than the $42.5 billion shortfall predicted by Mr. Reagan.
Either the President must accept a bigger 1982 deficit, congressional analysts say, or the budget will have to be slashed by additional billions.
Reagan says he still wants a $42.5 billion shortfall, as a step toward a balanced 1984 budget. So the outlook is for a battle royal over the 1982 budget , when Congress and Reagan come back to town after Labor Day.
If Mr. Reagan is determined to hold the 1982 deficit to $42.5 billion he appears to have to alternatives:
* He can try to battle through Congress additional spending cuts, in a budget already trimmed by more than $35 billion.
* He can veto appropriation bills that threaten, in the White House view, to bust the budget.
Neither course would be popular with Congress. The fact is, if the economic assumptions underlying the President's 1982 budget are flawed, then it is almost impossible to produce the results he wants.
Much of the disagreement between OMB and CBO is couched in terms of assumptions.Congressional assumptions, according to White House officials, are "faulty." OMB assumptions, says the CBO, are overly optimistic.
Often, of course, the problem of a budget gone askew stems from economic shifts and changes over which no one has control and that could not be foreseen when budget assumptions were made.
"The impact of unforeseen events on budget totals," says Rudolph G. Penner of the American Enterprise Institute, "is a matter of constant frustration to politicians. In designing programs, they struggle mightily to achieve certain spending and receipt targets only to see their efforts overwhelmed by unanticipated economic or other events."
Interest rates are a current example, adding $10 billion to $15 billion to projected 1982 outlays, because interest rates are higher than the White House foresaw.
Inflation, by contrast, can help the federal budget. Higher-than-anticipated inflation boosts taxpayers into higher brackets, increasing tax revenues above original estimates.
Every president, and Ronald Reagan is no exception, tends to pin his credibility to budget figures worked out by the OMB, however shaky the underlying economic assumptions may prove to be.
Think, for example, how much easier Reagan's task would be if he had not seized on a $42.5 billion deficit figure for 1982 and nailed it to the mast of his hopes and plans.
Presidential approval rating 1 mo. 4 mo 1 yr. 18 mo. Truman 87% * 63% 32% Eisenhower 67 74 71 75 Kennedy 72 71 78 66 Johnson 79 * 74 70 Nixon 60 63 63 55 Ford 66 * 45 46 Carter 71 63 52 44 Reagan 55 69
* Figures not available Source: Gallup Poll KEY INDICATORS Real growth, GNP 2nd Qtr. 81 1st Qtr. 81 Past year Percent, annual rate -2.4 8.6 3.1 Index of leading indicators Latest Month ago Year ago Seasonally adjusted 133.7 133.L9 128.1 'Discomfort' index Inflation & unemployment 22.2 16.1 8.79 Dow-Jones 30 industrials 892.22 939.40 930.38 New York Stock Exch. Composite index 71.97 74.94 70.35 Unemployment Percent 7.0 7.3 7.8 Civilian employment Millions, seasonally adj. 99.0 98.4 97.0 Auto production Units 518,167 719,203 +415,350 Average weekly wages In 1977 dollars $170.06 $171.40 $171.89 Housing starts Millions of units 1.055 1.021 1.277 Productivity 2nd Qtr 81 1st Qtr 81 Last year % change, annual rate 1.1 4.6 -0.2 Savings rate 2nd Qtr 81 1st Qtr 81 Last year Percent of salary 5.3 4.6 5.6 Net farm income 2nd Qtr 81 1st Qtr 81 2nd Qtr 80 Billions, 1967 dollars 8.6 7.0 7.1 Corporate profits 2nd Qtr 81 1st Qtr 81 2nd Qtr 80 Billions, after taxes $150.1 $169.2 $146.5 New plant & equipment 2nd Qtr 81 1st Qtr 81 2nd Qtr 80 Invest., non-farm, bills. $323.3 (r) $315.9 $289.8 US crude oil inventories Latest Month ago Year ago 335 Million/barrels avg. 378 386 379 US crude oil production Millions/barrels/day 8.6 8.6 8.6 US oil imports Millions/barrels/day 5.4 5.3 6.5 PRICES Consumer price index Latest YTD 12-month % change, annual rate 15.2 8.1 9.8 Gasoline Per gallon, unleaded $1.382 $1.391 $1.271 Home heating oil Per gallon 1.251 $1.259 $1.022 Wheat Per bushel $4.1125 $4.265 $4.345 Gold Latest Month ago Year ago London close, oz. 425.00 $407.50 $632.80 Silver New York close, oz. $9.27 $8.58 $16.09 Existing homes Latest Prev. month YEar ago Median US sales price $67,500 $67,700 $64,100 Implicit price deflator 2nd Qtr 81 1st Qtr 81 2nd Qtr 80 % change, annual rate 6.0 9.8 9.8 INTEREST RATES Prime rate This week Month ago Year ago Percent 20.50 20.50 10.75 AAA corporate bonds Percent yield 15.22 14.56 11.91 Treasury-bill rates 90-day, percent yield 15.832 15.563 10.025 Home mortgages Latest Month ago Year ago 25% down, 25 years Avg. 'quoted' rate 16.47 16.35 12.24 Avg. contract rate 14.53 14.32 12.21 New car loans Avg. %, 5 Boston banks 18.20 17.60 15.60 Money market funds 7-day 30-day 12-month Percent, avg. yield 17.20 17.2 NA
Sources for table
Tables and graphs above are based on data from the American Petroleum Institute, Board of Trade of Kansas City, Comex Inc., Donoghue's Money Fund Report of Holliston, Ma 01746, Federal Home Loan Bank Board, Federal Reserve Board, Massachusetts Commissioner of Banks, Moody's Investor Service, Motor Vehicle Manufacturers Association, National Association of Realtors, New York Stock Exchange, US Census Bureau, US Commerce Department Bureau of Economic Analysis, US Labor Department Bureau of Labor Statistics, US Department of Treasury.