US spending growth still going up, but it may lag GNP
Based on the laments of members of Congress, one would think they were slashing federal spending drastically. Actually, they haven't.
They have cut back on the growth of social programs. But this is being offset by increases in defense spending and costs of social security and medical programs. Altogether, federal spending will continue to rise over the next several years by more than the inflation rate.
These are some of the disclosures in an update by the Congressional Budget Office on the economic and budget outlook. The statistics do the talking.
According to CBO projections, federal outlays this fiscal year (ending Sept. 30), after about 20 months of Reaganomics and budget battles, will have grown 11 .5 percent. And over the next three years outlays will climb something over 7 percent a year (see table below), which is probably more than inflation will run. The CBO guesses that inflation, as measured by the broad gross national product deflator, will decline gradually from 6.6 percent in fiscal 1982 to 5.6 percent in fiscal 1985.
Since, however, the growth in federal spending will be lower than the nominal growth in GNP (total national output of goods and services in current dollars), federal spending will decline as a percentage of GNP. In other words, one of the main goals of Reaganomics - to trim the importance of the federal government in the economy - will be achieved.
The CBO numbers show federal outlays as a percentage of GNP slipping from 24. 1 percent in fiscal 1982 to 22.7 percent by fiscal 1985 (see table at left). That may not seem like a large change in terms of the noise in Washington. But to economists, it is a significant shift.
The revenue outlook, according to the CBO, is somewhat more erratic. Revenues grow only modestly this year and next because of the income tax cuts. Then in fiscal 1984 and '85 they start growing more rapidly than outlays. As a result, the budget deficit as a percentage of GNP starts to shrink - from 4.7 percent in fiscal 1983 to 3.8 percent in fiscal 1985. In dollars, the deficit will average about $155 billion a year over the next few years, the CBO projects.
Its report says: ''. . . balancing the budget in the next few years is not a realistic objective.''
What Congress has been changing significantly, at the insistence of the White House, is the emphasis of federal spending (see table at right). Defense spending will increase from fiscal 1980 to fiscal 1985 by 111 percent, while nondefense discretionary spending, which includes many social programs, will shrink 1.4 percent. Pensions and medicare will grow 73 percent.
By 1985, spending for national defense, social security and related programs, medicare, and net interest could account for three-quarters of federal spending. So, the CBO report notes, ''If the 1985 budget were to be balanced without further reductions in spending for defense and pensions, other noninterest spending would have to be cut by about one-half.''
Such drastic action seems unlikely. If the deficit is to be reduced, Congress will eventually have to face the need for either some reductions in the growth rate of spending on defense or pensions, especially social security. Given the success of American weapons against Soviet weapons in the Israeli invasion of Lebanon, it could be that Congress may decide defense is a more suitable and politically palatable area for spending restraint.
One caution is necessary with all these numbers. Economic assumptions are important. A change of 1 percent in the projected rate of real economic growth would increase or decrease the estimated deficit by almost $50 billion. If unemployment went up 1 percent from the CBO estimate, it would add $39 billion to the deficit. Or if interest rates climbed 1 percent, the deficit would climb
So all these numbers are rough. But they give some idea of where Reaganomics is taking the nation.
Government revenues and outlays Congressional Budget Office projections. (By fiscal year, in percentages) 1982 1983 1984 1985 Revenues as a percent of GNP 20.4 19.0 18.9 18.9 Outlays as a percent of GNP 24.1 23.7 23.1 22.7 Deficit as a percent of GNP 3.7 4.7 4.2 3.8 Growth in revenues 3.6 1.9 9.3 9.5 TGrowth in outlays 11.5 7.6 7.1 7.7 GNP (trillions of dollars) 3.040 3.323 3.660 4.013
How the government spends its revenues. (By fiscal year, in billions of dollars) Actual Projection Change 1980 1985 $ % National defense (except retired pay) 124 262 138 111 Pensions and medicare 182 315 133 73 Other entitlements 87 112 25 29 Nondefense discretionary 140 138 -2 -1 Net interest 52 118 66 127 Other spending 13 9 -4 -31 Offsetting receipts* -22 -44 -22 100 Total 577 910 333 58 *Proprietary receipts from the public and employer share, employee retirement.Source: Congressional Budget Office