Budget Deal Forces Little Change in US Spending Patterns

AFTER five months of jousting, jawboning, and staring each other down, the nation's top leaders have agreed to a $40 billion deficit cut this year - and $500 billion over the next five years. Some of the basic features of the package have been settled for several days: half the savings would come from spending cuts and half from higher taxes - including an increase in the top tax rate from 28 to 31 percent and a phase-out of exemptions for some high-income taxpayers.

Yet the hard-won budget agreement will only slightly affect larger trends in federal spending.

Most Americans have a dim, even distorted picture of where their tax money eventually goes, according to polling data. But the national budget forms a picture of a country whose burdens are shifting drastically.

The heaviest federal burdens are shifting from the nation's military and its interests in the world to supporting its elderly.

Federal spending on the elderly, mainly in the form of Social Security benefits, will account for about 35 percent of the budget this fiscal year, an amount that consumes about 7.3 percent of the US gross national product. Entitlements for the elderly are growing so steadily that the White House Office of Management and Budget estimates that Social Security will surpass defense spending within five years. Medicare spending is coming up fast. It has doubled every five years since 1975 and is projected to surpass both defense and Social Security early in the next century.

This week's budget package trimmed Medicare spending by roughly 5 percent, so the growth will be slightly moderated.

National defense is slowly declining as a share of the budget. It now accounts for about 25 percent of the $1.2 trillion budget.

Americans commonly grasp the relative importance of defense spending in their federal budget. But according to a Gallup survey taken last year for the Times Mirror organization, only 27 percent of the American public realizes that Social Security is one of the two largest spending categories in the budget. The most persistent distortion in the public notion of where its money goes concerns foreign aid. The single least popular part of the budget, foreign aid was tapped as one of the top two spending categories by 50 percent of Americans in the Gallup survey. Yet all foreign aid - humanitarian aid, security assistance, the entire State Department budget, and the United States Information Agency budget - add up to 1.5 percent of federal spending in the 1991 budget.

The fastest growing major expense in the federal budget is also the most alarming - interest on the national debt. Net interest now accounts for 14 percent of the federal budget.

After the deal for a $40 billion-deficit cut this year, the OMB projects a deficit of about $255 billion. Although that would mark a new record deficit in dollar terms, deficits have run far higher as a percentage of GNP. The peak year since World War II was 1983, when the deficit equaled 6.3 percent of GNP. It dropped almost in half in the late 1980s. But escalating deficit projections in recent months put it close to 5 percent of GNP.

The deficit would be $80 billion higher if the budgetmakers did not add in the surplus from the Social Security Trust Fund. This money is earmarked to pay fo the retirement of the baby-boom generation, but the government borrows it to help cover its shortfalls elsewhere.

The World War II deficits were stratospheric, reaching as high as 31 percent of the nation's GNP in 1943. But by 1947, the federal budget was running a slight surplus, growing out of its war debt. After the Korean war, the federal budget was scaled down about 20 percent, relative to the GNP. After Vietnam, however, the budgets held to their wartime high levels. ``That's the tipoff we were entering a new budgetary environment,'' says Allen Schick, a budget expert at the Urban Institute.

One reason politicians have found it difficult to cut budgets is the growth of ``mandatory'' programs. Mostly entitlement benefits to individuals, such as Social Security, mandatory programs have formulas and indexes established by law so that spending rises and falls according to demographic change. By 1994, the OMB expects half of all federal spending to fall in the mandatory category. Little of it is actually mandatory, however. Some of these programs are widely considered to be moral obligations the nation has incurred, yet Congress can legally change the programs to adjust their cost whenever it chooses.

As a practical matter, however, ``the great majority of fiscal 1991 spending is already in place no matter what Congress does,'' says Gary Burtless, a Brookings Institution economist.

Americans widely view federal bureaucracies as rife with waste. How much waste is difficult to pinpoint. One outside study in 1987, however, estimated that the Pentagon could save 20 to 25 percent of its weapons procurement costs with some feasible reforms in purchasing procedures. The study by the Center for Strategic and International Studies estimated that the military paid 90 to 200 percent higher prices than with an ideal system.

A decade ago, the Grace Commission found hundreds of billions of dollars in waste due to inefficiency. The General Accounting Office routinely estimates losses of similar magnitude through lax financial and management practices. The savings-and-loan bailout is their best argument. The cost of the bailout in the 1991 budget - although it has been moved off-budget for accounting purposes - is $62 billion, or about 5 percent of this year's federal spending.