Business and the budget: cuts good, but deficit isn't
The business community is giving President Reagan mixed reviews on his proposed 1984 budget. Executives generally favor the President's plan to trim domestic spending by imposing a one-year freeze on federal civilian and military pay and pension programs.
''We heartily approve of his attempt to limit domestic discretionary spending ,'' says Jack Albertine, president of the American Business Conference, a group of top executives at 100 fast-growing companies, with sales between $25 million and $1 billion.
''The President has bitten some bullets on federal pensions and military pensions,'' investment banker Peter Peterson notes approvingly. ''And focusing on reducing medical care costs is an extremely positive development,'' adds Mr. Peterson, chairman of Lehman Brothers Kuhn Loeb Inc. The President has proposed taxing employees' medical insurance benefits above $2,100.
But many on Wall Street and elsewhere in the business world are convinced that the $188.4 billion deficit the President projects for fiscal year 1984 and the $194.2 billion deficit estimated for 1985 are too high to permit a lasting economic recovery.
Treasury Secretary Donald Regan, who formerly headed the Merrill Lynch brokerage firm, admitted over the weekend that his friends on Wall Street ''would still like to see more cuts in federal spending.''
''The proposed deficit is unacceptably large,'' says Monte Gordon, research director at the Dreyfus Corporation, a mutual fund group. The document is, however, ''an acceptable basis for negotiation,'' he says.
Several business groups think defense spending is one area where negotiation is needed.
''Clearly his defense reductions are smaller than ours,'' says Peterson, who also heads a group of several hundred business and financial leaders calling themselves ''The Bi-Partisan Budget Appeal.'' The group has called for military spending cuts of $25 billion in fiscal year 1985 as part of a comprehensive plan to trim budget deficits. Mr. Reagan's reductions ''are on the order of one-third of that,'' Peterson notes.
Under the administration's budget proposals, defense spending would increase 14.2 percent in fiscal year 1984 to $238.6 billion or 28 percent of the federal budget. In the current budget year, defense spending accounts for 25.9 percent of the budget.
''Chances are rather large that defense spending increases will have to be scaled back'' to achieve domestic cuts, affirms Gordon Richards, director of economic analysis at the National Association of Manufacturers (NAM).
And many business officials have resigned themselves to a tax increase taking effect sooner than the President's standby increase. Mr. Reagan would have the standby tax take effect on Oct. 1, 1985, but only under certain conditions.
Congress is likely to pass an earlier tax, many tax policy analysts say. The Bi-Partisan appeal is calling for a tax increase of $60 billion in 1985. Such an increase would reduce the deficit and offer ''a clear signal to financial markets to get long-term interest rates down,'' Mr. Peterson argues.
Unless the deficit is cut below administration projections, corporations may have trouble borrowing money to finance new plants and equipment. The administration estimates the deficits will gobble up virtually all new private savings in budget year 1984. Business depends on these savings as one pool for loan resources. The deficit's share of net private savings will drop to 85 percent in budget year 1985 and 57 percent in fiscal year 1986.
''Unless further steps are taken, the deficits will be of such a magnitude as to not make possible significant private investment,'' says Michael E. Levy, director of economic policy research for the Conference Board, a business research organization.
And with the recovery expected to be well under way next year, deficits that swallow up such a large share of savings mean ''renewed pressure on interest rates,'' warns Mr. Richards at the NAM. ''There is some danger of interest rate pressure intensifying in 1984. That would act as a major drag on the recovery.''
While executives may quarrel with the size of the deficit, the President's Council of Economic Advisers gets relatively high marks for the economic assumptions underlying the budget. ''We feel they are quite realistic,'' Richards says. Others in the business community, including the US Chamber of Commerce, say the administration forecast of 1.4 percent growth in gross national product (GNP) this year is too low.
Business is generally not enthusiastic about the President's standby tax plan. The plan would take effect Oct. 1, 1985, if fiscal year 1986 deficit is projected at more than 2.5 percent of GNP. The tax would include a 1 percent surcharge on individual and corporate income taxes and an excise tax of $5 a barrel on oil.
''It is reasonably clear Congress is not willing to commit'' to such a plan, says the Conference Board's Mr. Levy. Many business leaders expect Congress to move to raise taxes by 1984.
A warmer reception from business is going to the President's plan to offer a tax break to companies that hire the long-term unemployed. Under the plan, certain jobless workers could take their unemployment benefits in the form of a voucher. A company hiring the worker would get a tax credit equal to the voucher.
''This will facilitate movement of people from the old smokestack industries to new industries,'' Mr. Albertine contends. ''Anytime you lower the cost of labor it causes employers to hire more people.''
But others think it will cause companies to favor applicants who offer vouchers. ''I doubt very much it will result in significant (new) job creation, '' says Mr. Levy.