CBO offers upbeat economic forecast

The nonpartisan Congressional Budget Office (CBO) has brightened its forecasts for the economy and the federal deficit. In an update released Monday of its February budget and economic projections, the CBO said it expects the overall near-term economic future ''to remain bright.''

''We do anticipate some slowdown due to this extraordinarily high real interest rate'' situation, said CBO director Rudolph G. Penner at a press conference Monday.

The CBO, the economic analysis arm of Congress, says that budget deficits over the period 1984-89 will be about 12 percent lower than earlier expected. Nevertheless, a massive tide of red ink totaling $1.262 trillion for the 1984-89 period will spill over federal budget accounts. As a result, interest rates will be higher and economic growth and business investment will be lower than would otherwise be the case, the CBO said.

Despite the drag on the economy from the deficits, the CBO says overall economic growth during the 1984-85 period will be stronger than it thought last February, unemployment will continue to edge down, and there will be a ''continuation of low rates of inflation through the next six quarters.''

The CBO's update is one of two reports due this week that will provide the underpinnings for the election-year debate about how to reduce the deficit. The second budget update is due later this week from the President's Office of Management and Budget.

Both President Reagan and Walter F. Mondale continue to make deficit-cutting options a major campaign theme.

On Monday, Mr. Mondale met with tax and budget advisers in Minnesota to work on a plan to reduce the deficit by cutting spending and boosting taxes.

Meanwhile, Vice-President George Bush met Monday with Mr. Reagan to develop campaign strategy. On Sunday, Mr. Bush said the President ''will consider'' revenue-raising measures other than income tax hikes to boost federal revenue if spending cuts do not prove sufficient to trim the deficit.

The Treasury Department says it is studying two such measures - a flat tax and a national sales tax. In a ''pure'' flat tax, most individuals would be taxed at a lower rate than at present, but the government could raise additional revenue by eliminating existing deductions and credits.

In his Saturday radio address the President pledged to veto any hike in personal income-tax rates and charged that Mondale would have to boost taxes by an average $1,500 a household to pay for programs he had promised. Mondale responded that the President was using ''hocus-pocus numbers'' and had carefully not ruled out tax hikes ''that would protect his rich friends.''

According to the CBO, the total deficits policymakers must tackle in the period 1984-89 will be $166 billion lower than the $1.428 trillion it projected in February. The CBO now expects the deficit to be $172 billion in fiscal year 1984, $178 billion in FY '85, $195 billion in FY '86, and $263 billion by FY '89 . In February, the CBO projected that the FY '84 deficit would be $189 billion and the FY '89 deficit would be $308 billion.

The reduction in the deficit projections is due largely to congressional budget trimming action, the CBO says. The gap between government income and spending will ''remain extraordinarily high without further deficit reducing actions,'' the CBO report warns.

By 1989 the CBO expects the deficit to eat up 4.9 percent of the nation's economic output, or gross national product (GNP), vs. a forecast of 5.7 percent of GNP in February.

''We have succeeded in stabilizing the deficit-to-GNP ratio,'' Dr. Penner says. ''We see that as an important event, but not important enough to cure the problem.''

The total government debt held by the public is slated to grow to 46 percent of GNP by 1989, the highest debt-to-GNP ratio since the early 1960s. Given this massive debt load, and the fact the the Deficit Reduction Act of 1984 is holding down other federal spending, interest payments on the federal debt are now expected to rise from 13.1 percent of total budget outlays in 1984 to 16.4 percent in 1989, the CBO says.

Ironically, the economy's stronger-than-expected growth will not provide much help for the deficit after this year, the CBO says. The reason is that the CBO expects big federal credit demands to lead to ''a persistence of historically high real interest rates.'' Real interest rates are the difference between the nominal rate and the inflation rate. For example, 90-day Treasury bills, which were yielding 10.46 percent Friday, will average 9.7 percent in 1985, the CBO said. In February CBO forecast T-bills would average 8.9 percent in 1984 and 8.6 in 1985.

When higher interest rates are factored into the government's interest bill on the deficit, the debt costs after 1985 ''overcome the beneficial effect'' of faster-than-projected growth in the 1984-85 period, the CBO says.

CBO now expects the economy to grow 6.6 percent from the end of 1983 to the end of 1984 and 2.8 percent between the fourth quarter of 1984 and fourth quarter of 1985. Consumer prices are expected to rise 4.5 percent from the fourth quarter of 1983 to the end of 1984 and increase 5.2 percent between the end of 1984 and the end of 1985. The CBO also expects unemployment to average 7. 3 percent in 1984 and 6.7 percent in 1985.