Economy surges, deficit shrinks, but . . .US experts concerned at long delay on fiscal action
It seems like Christmas in July for government financial planners. Stronger-than-expected economic growth is trimming the federal government's projected deficits, according to new figures released Monday by the Office of Management and Budget (OMB).
Since the latest federal budget first hit the street in January, the estimated gap between government income and spending has fallen $9.1 billion for fiscal year 1984, $24 billion for 1985, $18.7 billion for 1986, and $23.7 billion for 1987. The latest deficit estimates also are significantly lower than revised figures issued in April.
The prospect of shrinking deficits prompted Treasury Secretary Donald T. Regan to say last week that ''it's entirely possible'' that a surging recovery, coupled with savings from congressional spending restraint, will eliminate the need for new tax increases.
Congress has reacted to the administration's position by backing off from tax-boost plans, at least until fall. Some observers say a major tax bill is not likely until 1985.
But a variety of outside economists are playing Scrooge. They argue that some of the administration's deficit projections are too optimistic and that the recovery won't wipe out the nation's budget woes.
''Stronger growth won't cure the deficit,'' says Robert Gough, senior vice-president at Data Resources Inc., an economics forecasting firm.
''A rebound in the economy won't solve the budget problem,'' adds Ben E. Laden, vice-president and chief economist of T. Rowe Price Associates Inc., a mutual-fund company. Spending cuts or higher taxes will be required, he says.
Experts disagree about the degree of danger posed by delaying action on deficits. ''It makes a difference, but not a dramatic difference,'' says Daniel Van Dyke, senior economist at the Bank of America. But he notes that as long as action is postponed, credit markets will remain tight.
Since the government must borrow to finance the deficit, it competes for funds with private borrowers and puts pressure on interest rates.
Donald Ratajczak, director of the Georgia State University Forecasting Project, is much more concerned: ''We have a potential interest-rate time bomb.'' If interest rates were to rise sharply, he calculates, the Treasury could end up paying $200 billion in interest charges on the national debt in fiscal 1984, instead of the budgeted $105 billion.
He says interest rates are not likely to rise sharply next year. He thinks 91 -day Treasury bills will average 8.8 percent for 1984, vs. a 9.13 percent yield at the latest auction Monday.
''The possibility is that the business sector will go on a capital spending binge and then we will have real trouble in terms of interest rates,'' Mr. Laden says. Business borrowing would run up against government financing needs, shoving up interest rates. As a result, consumers wanting to purchase big-ticket items, such as major appliances and cars, could be squeezed out of the market as loan costs rose.
To prevent such problems, the administration had been calling for contingency taxes to take effect in fiscal 1986. But that plan is now ''dormant,'' says Martin Feldstein, chairman of the President's Council of Economic Advisers.
With the White House backing away from tax increases in 1986, and firmly opposed to boosts before then, the congressional tax-writing committees last week postponed action on revenue-raising plans until late September. The 1984 budget resolution had called on the panels to find a way, by July 22, to raise $ 73 billion over the next three fiscal years.
House Ways and Means Committee Chairman Dan Rostenkowski (D) of Illinois ''has been clear about his unwillingness to move a $73 billion tax increase forward . . . without the President's, if not support, at least neutrality,'' says a committee source. And since Congress will be campaigning in 1984, ''short of a crisis, it will be almost impossible to move a revenue bill next year,'' the staff source says.
Still, new revenue measures are needed, contends House Budget Committee chairman James Jones (D) of Oklahoma. ''We cannot grow our way out of our deficit problem.''
Of course, the robust recovery will help the budget situation. Tax receipts rise with gains in personal and corporate income. At the same time, a lower level of joblessness cuts the cost of unemployment insurance and other recession-related programs. Each 1 percent rise in the gross national product (GNP) cuts the deficit by about $15 billion.
The outlook for the GNP has risen significantly since January. The administration originally predicted inflation-adjusted growth of 3.1 percent between the fourth quarter of 1982 and the fourth quarter of 1983. They are now predicting 5.5 percent growth.
As a result, the administration now projects the 1983 fiscal year deficit at and the 1986 gap at $129 billion.
Following normal OMB conventions, the estimates assume passage of all the President's tax and spending proposals, even though Congress has already rejected many of his nondefense spending cuts, and other changes in his program are likely.
Forces that counteract the influence of economic growth include commitments for increased spending on defense and other items in future years. In addition, the aging of the population means an increasing number of recipients - and higher costs - for programs like social security. Finally, even if the deficit can be cut, the amount the government must borrow rises every year, thus pushing up interest costs .
In addition to technical factors, there are several forces ''on the spending side which will serve to counteract the influence of economic growth,'' Mr. Gough says.
''Stronger growth won't cure the deficit,'' Gough concludes.