Fiscal fallout from the gulf crisis

Leonard Silk

September 10, 1990|By Leonard Silk

THE ECONOMIC outlook is clouded with more uncertainties than you can shake a computer at.

First, of course, is the unknown of what the cost of the crisis in the Persian Gulf will be. That depends on the scale and duration of the operation, and, from the standpoint of the U.S. budget, what share of our costs will be picked up by Saudi Arabia, the government-in-exile of Kuwait, Japan and other countries.

Last week the Pentagon estimated that by the end of this month American operations in the gulf will amount to $2.5 billion above budgeted expenditures. The commonly used figure at the Pentagon is that the costs of the Mideast crisis are running at $1 billion a month.

Analysts consider that figure on the high side. But the military outlays that lie ahead will depend on the future scale of the operation, its duration, and how much is paid by other countries; the numbers will escalate drastically if the buildup turns into a war.

Secretary of State James A. Baker III told Congress last week that the administration expected to maintain a long-term military presence in the gulf. But nobody knows what that means in terms of forces or weapons or stockpiles, above and beyond planned military outlays for the next five years.

With the budget deficit worsening, not only from the Middle East conflict but also from the savings and loan bailout, the pressure will still be on the Pentagon to hold down military expenditures by reducing outlays on weapons systems related to strategic deterrence of the Soviet Union, now that the Cold War is officially over, and on expensive long-range projects like "Star Wars."

The July estimate by the Congressional Budget Office for the federal deficit for the current fiscal year, which ends next month, was for a deficit of $165 billion. But that has now been swollen by $68 billion for the additional costs of the savings bailout, raising the estimate to $233 billion, compared with the Gramm-Rudman target for this year of $100 billion.

With the sluggish economy cutting tax revenues and the extra costs of the gulf operation, the current year's deficit will go still higher, probably to $250 billion.

The next fiscal year's "baseline" deficit figure -- not counting any steps Congress may take to cut the deficit -- is also estimated to be about $250 billion, without allowing for a faster rate of military spending; that figure compares with the Gramm-Rudman target for the 1991 fiscal year of $64 billion, which is supposed to shrink to $28 billion in 1992 and zero in 1993.

It seems as sure as death and taxes that Gramm-Rudman targets will be changed, but with the White House-congressional budget negotiations still in the spotlight, nobody yet knows how.

The anticipated cuts in military spending and increases in energy taxes, once the focus of efforts to cut the budget taxes, have been hit hard by the gulf crisis and the sharp climb in oil prices.

Added to the military costs are the new economic burdens, like the effect of higher oil prices on the United States and other industrial countries, on Eastern European countries struggling to move to market economies, and on Middle Eastern states opposed to Iraq's effort and suffering the costs of closing pipelines or losing trade.

American officials are using a figure of $3 billion a year to cover such losses, although Turkey and Egypt alone are each asking for $2 billion more.

A cardinal uncertainty is whether the Middle East crisis will have its primary effect in strengthening recessionary or inflationary forces -- or both at the same time. A majority of economists now say the correct answer is "both at the same time," replicating the stagflation of the 1970s that resulted from the oil shocks of 1973-74 and 1979.

Some economists say a recession has already started, and a majority now expects one to begin in the fourth quarter or early in 1991.

But that forecast is still far from unanimous.

Virtually everyone expects the crisis in the gulf, the climb in oil prices and the worsened federal budget deficit to put upward pressure on prices. The slide of state and local government budgets from surpluses to their largest deficits on record is aggravating the net public deficit and the U.S. savings shortage.

All of this has driven the dollar to its lowest level ever against the German mark, the Swiss franc and some other currencies.

The Federal Reserve, confronting the inflation-recession dilemma, seems to be holding in place, hesitant to ease further in the midst of the gulf crisis, at least until it sees the whites of a recession's eyes.

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