Treasury chief offers Congress a rosy view of economy's future
The Reagan administration unveiled a revised economic forecast Wednesday that is generally more optimistic about economic growth and interest rates than projections issued by private forecasters or the Congressional Budget Office (CBO).
Federal deficits react sharply to changes in economic variables like interest rates. So the economic trends projected for 1984-89 by Treasury Secretary Donald T. Regan in testimony before the Joint Economic Committee will let the administration issue budget-deficit estimates later this week that are sharply lower than those the CBO issued on Monday.
The economic conditions that the administration expects will produce deficits ''which can be handled by reasonable spending restraint on the part of Congress, '' Mr. Regan said. This takes into account the $104 billion net revenue increase over five years resulting from the Deficit Reduction Act of 1984. A key tenet of President Reagan's reelection effort is the assertion that the deficit problem can be handled without raising personal income taxes.
Democratic presidential candidate Walter F. Mondale accepts the higher CBO deficit estimates and says the flow of red ink will be so large that tax hikes will be needed along with spending cuts. He asserts that Mr. Reagan has a secret plan for raising taxes after the election.
The Treasury secretary sought to counter apparently contradictory statements on taxes that emerged from separate sessions the President and Vice-President George Bush held with the press Monday.
''There are no plans for tax increases in 1985 by this administration,'' Regan said. He refused to rule out increases in 1986 and beyond, saying, ''We haven't come to grips with (the 1986) budget yet, let alone 1987 or 1988.''
Regan added that claims by Mr. Mondale that Regan favors a national sales tax are untrue. Sales taxes are under study at the Treasury Department along with various other tax reform options. But the proposals, which are scheduled to be released
after the election, are being designed so they do not increase the government's tax bite, Regan said.
''We are not trying to raise taxes by tax reform,'' he said.
He also ruled out any cut in social security benefits if Reagan is reelected.
While Reagan budget figures will not be formally released until today at the earliest, Regan said the deficit will be less than $175 billion in fiscal year 1984 and will decline in future years. The CBO projects a deficit of $172 billion in FY '84, rising steadily to $263 billion in FY '89.
Rep. Lee H. Hamilton (D) of Indiana said the administration's deficit projections range as low as $150 billion a year. Regan testified that by 1989 the deficit could be down to between 2.5 and 3 percent of gross national product (GNP), the total value of goods and services produced in the economy. The CBO estimates the '89 deficit at 4.9 percent of GNP. Based on CBO estimates of the economy's size, the administration appears to be saying the '89 deficit could be in the range of $135 billion to $160 billion.
The administration's interest-rate forecast helps explain why its deficit projections are lower than many others. With the economy's growth expected to slow and investors' inflationary expectations likely to diminish, Regan says, ''the factors are all there for a reduction in interest rates.'' He was referring to short-term interest rates, since longer-term rates already have started to decline.
Interest-rate forecast (3-month T-bills) 1984 '87 '89 White House 9.5% 7.2% 5.1% CBO 10.0% 8.9% 8.9%
The administration expects the rate on three-month Treasury bills to decline from an average of 9.3 percent in 1985 to 5.1 percent in '89. The CBO, on the other hand, sees T-bill rates at 8.9 percent in '89. Most private interest-rate forecasts do not extend that far. But Wharton Econometric Forecasting Associates puts T-bill rates at 13.49 percent in '86. That year the administration expects a rate of only 8.5 percent.
The effect of differing interest-rate forceasts can be sizable. The CBO estimates that each 1 percent increase in interest rates from what it predicts adds $26 billion to the FY '89 deficit.
Higher economic growth estimates also affect the deficit. The CBO says a 1 percent increase in the economic growth rate would slash $105 billion from the deficit by 1989. From '85 to '89 the administration's growth estimates are 0.7 to 0.9 percent higher each year than the CBO's.
Regan admitted he is ''an economic agnostic. I don't believe (forecasts) beyond 12 months.'' Given the difficulty of long-range forecasting, ''Congress may want to reconsider the requirement of a five-year economic forecast and budget outlook.''