Budget Brokers Show Little Enthusiasm For Deficit Plan
But many say it will help spur growth in long term
THE current budget deal cut between the White House and Congress has few enthusiasts. Supporters, admittedly only resigned to the quickly devised compromise, endorse it as a means toward future economic growth. Office of Management and Budget director Richard Darman hastens to tell opponents that ``each little piece of the plan is tolerable, and the big piece is good for the economy.''
The budget brokers agreed to higher taxes and spending cuts - $134 billion in new taxes, limits on income tax deductions for households earning $100,000 plus, and cuts in the defense budget, Medicare, and farm subsidies - all slated to reduce the federal deficit by $500 billion over five years.
In the short term, says Isabel Sawhill, a senior fellow at the Urban Institute, the plan's net effect will be negative. ``That means $500 billion of spending power out of the economy - with reduced production, more unemployment, less income, and less money to spend on consumer goods.''
Offsetting this expected contraction of the economy, she says ``will be lower interest rates because the government isn't borrowing so much.'' The natural reduction in interest rates, without intervention from the Federal Reserve Board, will in turn help to spur spending.
Lower interest rates in the United States will not attract foreign capital, she says, and the value of the dollar will drop because ``fewer foreigners will buy our currency.'' But when the dollar falls, US exports are lower priced and more competitive abroad.
US reliance on international finance is more apparent than ever. The US is heavily dependent on foreign investment and credits to sustain domestic spending. During the past several months, for example, economists have tracked the reduction in Japanese purchases of US securities. Higher interest rates in Europe have lured Japanese investors away from the US.
French Finance Minister Pierre Beregovoy, whose own country has benefited from Japan's investment shift, suggested last week that if US budget summiteers came up with a viable plan to reduce the deficit, his own government may lower interest rates to blunt the impact on the US dollar. Coordination of monetary policy among Group of Seven countries - the US, Canada, France, Germany, Italy, Japan, and Britain - was discussed during the International Monetary Fund and World Bank meetings in Washington last week.
But lower interest rates will have to start at home, Ms. Sawhill says. Proponents of the current budget package are buoyed by Federal Reserve Board chairman Alan Greenspan's contention that the budget agreement reached last Sunday offers a ``credible, enforceable reduction in the federal deficit.'' Sawhill says that, after a deficit-reduction package is passed and Greenspan ``takes action to increase the money supply and lower interest rates further, the net effect of the package will be positive.''
Other observers are less sanguine about the plan. Charles Bowsher, comptroller general of the Congressional General Accounting Office (GAO) called the package a ``good start,'' but stressed that it will fall short of producing the $500 billion in deficit reductions needed over the next five years. According to GAO calculations, additional tax increases will be needed in one to three years.
``Any time taxes are increased, we're put at a competitive disadvantage,'' says Jim Miller, budget director with the Reagan administration and currently chairman of Citizens for a Sound Economy. ``Our government spending will only continue to grow with tax increases, which will finance new spending.''
Of all the excise taxes listed in the package - tariffs on alcohol, cigarettes, and luxury purchases of furs, boats, and cars - the one tax that is not discretionary is that on fuel. Drivers can look forward to a 5-cent-a-gallon tax increase as of Dec. 1; another 2 cents a gallon Jan. 1, 1991, and another 5-cent hike July 1, 1991.
To correct what he saw as regional imbalance - motorists in the Western US who drive the longest distances and would bear the brunt of the gasoline tax - Sen. Lloyd Bentsen (D) of Texas demanded a heating oil tax to be included in the package. This 2-cent-a-gallon tax will heavily impact the Northeastern states.
A study released earlier this week by the House Ways and Means Committee says the plan's higher taxes and reduced benefits will eat into the incomes of the country's poorest and oldest citizens, who have the greatest health-care needs. Benefits for Medicare recipients will take the biggest single nonmilitary spending cut. Health insurance for 33 million Social Security recipients will be slashed by $60 billion over the next five years.
Farmers' subsidies will be cut by $13 billion in five years, scaling down the government's payments to cotton, corn, rice, sorghum, and wheat growers.
The plan is not without tax breaks. Mr. Darman says incentives offered to investors in small businesses are designed ``to get incremental investment in these small companies.'' He sees small companies as ``bigger job creators than large companies.''