Share this story
Close X
Switch to Desktop Site

America's deficit gap grows despite a booming economy

''If control of the budget deficit is put on track by early 1985,'' says Lawrence B. Krause of the Brookings Institution, ''the US could have three years of sustainable economic growth,'' spurring recovery throughout the world.

A growing US economy pulls in imports from other nations, thereby helping those countries to shake out of recession. So far a brisk recovery is evident only in the United States.

About these ads

''But,'' Mr. Krause adds, ''the budget deficit could stop'' the US recovery in its tracks.

''It is highly questionable that we can maintain sustained growth with structural deficits, in 1986 and following years, in the $225 billion range,'' says Robert S. McNamara, former president of the World Bank.

Deficits at the $200 billion level will occur at least through 1986, Congressional Budget Office director Alice M. Rivlin says, unless Congress raises taxes and cuts spending. Tax revenues under current law will shrink to 18 percent of gross national product by 1987, she says, while government outlays will remain constant at 24 percent.

That yawning gap, widening yearly as the economy grows, constitutes the structural deficit built into the budget, which recovery alone cannot erase.

Interest paid by the US Treasury to finance the deficit now swallows 13 cents of every tax dollar and forms the third largest component of the budget, after benefit payments to individuals (social security, medicare, veterans' pensions, etc.) and defense.

''Simple arithmetic tells you that the deficit must come down,'' says Mr. Krause, a specialist on international economics. ''The same arithmetic shows that you must have tax increases to do it.''

Controlling the deficit, in his view, ''must be done 80 percent through tax hikes, 20 percent through spending cuts.''

About these ads

Mr. McNamara foresees a stalemate on the deficit until after the 1984 elections. ''We can't develop a political consensus among supposedly sophisticated people to take the steps needed to handle the problem.''

Other experts are blunter. Neither President Reagan nor lawmakers, they say, care to risk possible voter wrath over higher taxes, although tax increases ''clearly are in our common interest,'' McNamara says.

Treasury Secretary Donald T. Regan argues that budget deficits have little impact on interest rates. ''I have read such reports,'' McNamara says, ''and I don't believe them.''

''Of course there is a correlation between huge deficits and interest rates, '' says Brookings economist Barry P. Bosworth. ''The administration argument to the contrary is specious.

''Deficits in the past usually have been associated with a depressed US economy, when private-sector borrowing was low,'' Mr. Bosworth says. ''Now the White House anticipates huge deficits in a expanding economy, when private-sector borrowing will be brisk and will collide with Treasury borrowing. We're going to borrow in a booming economy.''

In the April-June quarter of 1983, the US Commerce Department reports, the US economy grew at a torrid 9.2 percent pace, faster than the 8.7 percent calculated earlier. Growth in the current quarter, which ends Sept. 30, also is expected to be very brisk.

Such growth pulls people out of unemployment and puts them back to work. But it also may speed the day when a rising private-sector demand for loans will collide with Treasury borrowing, pushing up interest rates.

Martin S. Feldstein, President Reagan's chief economic adviser, is among those who hope the economy will cool off by year-end to a 4 to 5 percent growth rate, thereby easing pressure on rates.

''If Congress would act before the end of 1983 to raise revenues and/or reduce spending enough to produce a zero structural deficit in 1988,'' McNamara says, ''there would be a dramatic drop in US interest rates.''

Neither Congress nor White House seems willing to take the politically hazardous step of raising taxes before the '84 elections.

Meanwhile, the economy rushes along, creating good employment news in the short term, but foreshadowing a clash between private borrowers and a big-shouldered Treasury muscling ever more strongly into the market for money.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.