Deficit's Climb Will Continue, Analysts Indicate
President and Congress putting tax relief, spending hikes on table to stimulate economy. FEDERAL BUDGET
WITH release of its proposed federal budget, the Bush administration on Jan. 29 begins months of haggling with Congress over how to spend the government's money.
Regardless of the outcome, there are two certainties: The federal government will continue to spend more than it generates in revenue, and the nation's staggering debt will continue its perilous climb.
If the political will existed to slash government spending and broaden the tax base, United States fiscal planners could help to reverse this trend. But Washington is headed in the opposite direction. President Bush and Capitol Hill legislators are scrambling to find ways to boost the sagging American economy during this election year. They have put tax relief and spending increases on the table as a way to create economic activity and jobs.
Public- and private-sector economists warn that such measures will only contribute to a long-term slide in the US economy. Lower revenues and higher spending could spiral the nation's $2.5 trillion debt to $4 trillion over the next five years, says Barry Bosworth, a senior economist and expert on budget policy and debt at the Brookings Institution.
US government forecasts project that the nation's economy will slowly emerge from recession without the robust growth associated with other post-recession periods. The soaring US debt will push down an already abysmally low rate of domestic investment. Slower American productivity means a full economic recovery is even more remote, says Mr. Bosworth.
Despite this year's $350 billion federal budget deficit and a national debt that skyrockets past $12 trillion when private-sector household and business debts are included, US taxpayers want more government programs and fewer taxes, says Bosworth.
Murray Weidenbaum, chairman of the Council of Economic Advisers in the first Reagan administration, says he is worried about what the budgeteers will produce. "If they plan to spend more money and cut taxes without strengthening the economy, then we'd be better off if they did nothing," he says. Indeed, only months ago, Bush's advisers counseled him to do little more than pressure the Federal Reserve Board to lower interest rates. But the continuing recession and December's 7.1 percent unemployment rate spurred Bush to come up with an economic recovery plan, part of the $1.5 trillion budget plan announced Jan. 29.
Economists warn that "quick fix" attempts to stimulate the economy through tax cuts would only rob the government of desperately needed revenue. The debt-strapped federal government has partly retreated from a host of social expenditures, such as Medicaid and food-stamp programs, forcing state and local governments to fill financing gaps.
Nebraska state comptroller Robert Luth says the financial pressure is more than states can bear. Given the federal debt, he says, "the odds of states receiving more money for these growing programs are slim."
Mr. Luth is chairman of the National Association of State Auditors, Comptrollers, and Treasurers task force on improving federal financial management. He says the more debt is incurred by the federal government, the heavier the burden will be on the states to fund costly welfare services. Unless federal budget planners look for ways to cut spending "to reduce the deficit and live within our means," says Luth, the states will have to reschedule investment programs and put off infrastructure repairs and ma intenance.
Budget planners still ignore these long-term necessities in favor of the short-term political gains. "They're competing with each other over who can do the most for the middle class," says Mr. Weidenbaum. Bosworth says politicians who offer the middle class tax breaks threaten to "bankrupt" the economy.
"People think they're being squeezed because of taxes. What they don't realize is that it's not the taxes - they're not rising. The reason people are squeezed is because their before-tax income is declining. For the past 15 years, the average income per family has been flat," he says, and inflation has eaten into its value. "The reason that income is being squeezed is because we don't invest anything to ensure that the American worker's wage will increase. The country is caught in a trap."
The US compares poorly with other leading industrial nations in investment in future growth, says Bosworth. It invests 4 percent to 5 percent of its gross national product (GNP) in research and development, technology, and other contributors to economic growth. Sixty percent of the investment pool is funded by domestic borrowing; the remainder is secured by overseas loans.
By contrast, Japan sinks 15 percent of its GNP into productive investments; European countries average 10 percent. These foreign competitors, says Bosworth, invest that money free and clear of debt and interest payments.