Share this story
Close X
Switch to Desktop Site

Wrestling with the deficit. Balanced budget by '91 may not do the trick

Economists and the White House appear to differ on the economic impact of the budget reduction plan. The Senate's plan to balance the federal budget by 1991 would have only a modest impact on individual finances and the US economy as a whole, economists say.

Some of them doubt that Congress will actually make the reductions the bill calls for. Several also say the deficit should be brought down even faster than the Senate bill schedules.

About these ads

Lower federal deficits might allow the Federal Reserve Board to adopt a slightly easier monetary policy, forecasters say. That would allow interest rates to drop a bit.

This drop in interest rates could have both positive and negative effects. United States exporters could see sales improve as lower interest rates helped nudge the dollar down, thus making US goods more competitive in foreign markets. But the falling dollar would also raise prices for imports, thus putting upward pressure on domestic inflation.

Meanwhile, cutbacks in government spending would hurt government contractors, including defense companies, analysts say.

This modest assessment of the plan's impact is disputed by President Reagan. Deficit reduction, coupled with the Reagan tax plan, are ``a sure recipe for a vibrant, surging economy into the 21st century,'' the President said Thursday in Deerfield, Ill., where he was pushing his tax-reform plan.

While the President restated his support for the balanced-budget plan, Senate Majority Leader Robert Dole (R) of Kansas charged that complicated steps the Reagan Treasury Department took Wednesday to keep federal checks from bouncing have ``given the House plenty of time to go out and kill'' the balanced-budget plan.

``My response is the Treasury pulled the plug on us,'' by preventing a financial crisis that could have forced the House's hand.

The balanced budget plan authored by Sens. Phil Gramm (R) of Texas, Warren Rudman (R) of New Hampshire, and Ernest Hollings (D) of South Carolina cleared the Senate Wednesday by a vote of 75-to-24. The measure would trim the allowable federal deficit by $36 billion in each of the next five budget years, leaving a balanced budget by fiscal 1991.

About these ads

The plan, which was tacked onto a bill raising the government's debt ceiling above $2 trillion, next goes to a conference with the House of Representatives.

Economists are cautious about predicting the impact of a bill still working its way through Congress and subject to change. And the impact will depend on the precise list of spending cuts or a combination of cuts and tax increases which are made to achieve the annual $36 billion deficit reduction.

``It is still a little bit vague. We don't know what will get cut,'' says David Wyss, senior vice-president of Data Resources Inc., a major forecasting company.

Forecasts of the budget plan's economic impact also assume future Congresses will abide fully by the measure. ``It is like saying I will lose 40 pounds in the next two months. Saying that and doing that are two different things,'' notes Dorothea Otte, of the Georgia State University Forecasting Project.

But if the Gramm plan were to pass in its current form and be implemented, ``it is the minimum of what is necessary and would overall have a positive impact,'' says Bernard Markstein III, senior economist at Chase Econometrics. He estimates that the plan might boost the nation's inflation-adjusted econonmic output by about 1/2 of a percent.

If the budget were balanced by spending cuts, ``for the economy as a whole it would be a net plus,'' says Mr. Wyss at DRI. Lower government spending would be offset by the strengthening effect lower interest rates would have on the private sector.

While deficit reduction should provide modest help to the economy in the long term, the battle over the deficit and federal debt is expected to push up interest rates in the short term. As Congress continues to wrangle over a new debt ceiling, the Treasury has had to postpone a scheduled sale of new debt to cover the gap between what the nation is spending and the tax revenues flowing into federal coffers.

When Congress finally agrees on a new debt ceiling, the Treasury is expected to have to come to market by early November with an estimated $50 billion in new bonds and notes. The sudden oversupply of Treasury issues is expected to push up the yield investors demand to buy the notes.

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