Share this story
Close X
Switch to Desktop Site

A trip to Gramm-Rudman's fiscal 1987. Despite murky picture, bill is expected to shave paychecks and growth

Uncle Sam's adoption of a meat-slicer approach to budgeting could cut into both individual wallets and the overall economy, experts say. To see why, take a hypothetical journey in time to October 1986.

Congress and President Reagan find they can not agree on how to shrink or eliminate enough programs to bring the projected budget deficit for fiscal year 1987 down to $144 billion.

About these ads

So a large chunk of the federal budget is about to be run, like a roll of baloney, through the Gramm-Rudman meat slicer to produce the $50 billion in required trims.

Gramm-Rudman is the law requiring the federal govermnent to have a balanced budget by fiscal year 1991. If Congress and the White House can't agree on how to reach deficit targets, the law requires across-the-board spending cuts. Half must come from defense, the rest from domestic programs.

By fall 1986, this whirling legislative blade could be taking slices from scores of federal programs. The potential effects of the cuts include:

Boosts in state and local taxes as jurisdictions try to make up for the loss of federal funds for highways, mass transit, and urban and rural development programs, among others. ``I can guarantee you that the next two legislative sessions at the beginning of 1986 and 1987 will have record [tax] increases in most legislatures,'' says Stephen Silbiger, associate director of the American Federation of State, County, and Municipal Employees.

Slower growth in individual incomes as the economy cools due to the cutback in federal spending. The size of the economic slowdown will depend on how much and how fast the Federal Reserve loosens its hold on credit. At least one major economic consulting firm predicts trouble if Congress adheres to the current Gramm-Rudman deficit-reduction timetable beyond the 1988 budget year.

When Data Resources Inc. plugged the Gramm-Rudman deficit targets into its computer model of the US economy, it found ``you can't get to 1991 by assuming the Gramm-Rudman schedule,'' says DRI vice-president Robert Gough. ``The problem is too much [budget cutting], too quickly. Monetary policy can't handle it.''

If the budget cuts continue on schedule, after FY 1989 the economy either slips into a recession or the Fed has to crank up the printing press so much that inflation is rekindled, DRI says.

About these ads

Hikes of at least 12 percent or comparable service cuts in a host of government programs including Amtrak, job training, Small Business Administration loans, and Coast Guard services for boaters. State and local user fees for highways and subways could also rise as federal funds dry up. Fees associated with student loans would rise by a fixed amount.

Reductions in interest rates as the federal government takes a smaller share of lendable funds. By 1991 the corporate bond rate would be 7.5 percent, 1.5 percentage points lower than it would be without Gramm-Rudman, says Chris P. Varvares, vice-president of Laurence H. Meyer and Associates, a St. Louis-based economic consulting firm. The anticipation of these lower rates and their positive effect on corporate profits has helped fuel the stock market's recent run-up.

Lower interest rates also would help the value of the dollar drop on foreign-exchange markets, thus trimming the nation's trade deficit and boosting the fortunes of US companies that try to sell products overseas. Mr. Varvares's calculations show the trade deficit nearly disappearing by 1991 due to the budget cuts' effects.

It is very difficult to predict the precise size of the changes Gramm-Rudman will bring in government services or the economy. The budget cuts required for fiscal year 1987 hinge on how much Congress trims spending in fiscal 1986, which is already under way. There are some signs that Congress is holding back on FY '86 budget reductions, since Gramm-Rudman limits the required cuts this year to $11.7 billion even if the 1986 deficit target of $171.9 is not reached.

Huge chunks of the budget, including social security, interest on the national debt, and a variety of programs to aid low-income Americans, are completely shielded. Partial protection is offered to other popular programs, including medicare. As a result, thicker slices will have to be taken from the parts of budget that are unprotected.

Office of Management and Budget Director James Miller is looking for budget cuts of around $50 billion for 1987 and is examining $430 billion worth of programs to find these savings. Under his estimate of what is cuttable (which departs somewhat from Gramm-Rudman provisions), eligible programs would have to take an across-the-board cut of about 12 percent. However, Mr. Miller says he hopes to convince Congress to eliminate some programs so as to avoid Gramm-Rudman.

While the deli-slicer approach is relatively neat, it is only one outcome Gramm-Rudman may trigger, specialists say. Figuring out what Gramm-Rudman will do requires at least as many assumptions as there are members of Congress who think they should be president.

The first assumption is that the law is constitutional -- an assumption not universally held. Rep. Mike Synar (D) of Oklahoma filed suit in federal court Dec. 12 challenging Gramm-Rudman's constitutionality.

Another assumption, by no means certain, is that Congress and the President will fail to come up with the needed budget cuts or a combination of budget cuts and tax increases. To avoid automatic cuts or a tax increase, 30 to 50 nondefense programs will have to be shut down in 1987 alone, Senate Finance Committee chairman Bob Packwood (R) of Oregon says. To meet the Gramm-Rudman target for 1987, the Reagan administration's tentative '87 budget proposes a variety of drastic steps, including sale of the Fe deral Housing Administration.

Finally, projections of Gramm-Rudman's effects assume no congressional efforts to amend the law or no recession. If the economy shrinks for two consecutive quarters, the bill allows Congress to suspend the maximum deficit target for that fiscal year and the following one.

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