Bush seeks grass-roots budget support THE NUMBERS Economists say deficit reduction is really $35 billion

October 03, 1990|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

WASHINGTON -- Instead of a deficit reduction of $40.1 billion in the current fiscal year, as announced Sunday by President Bush and the budget summit negotiators, private economists indicated yesterday that the actual reduction would be about $30 billion to $35 billion.

The summit's original goal had been $50 billion.

The economists' predicted reduction falls far short of what would be needed to persuade the Federal Reserve to lower interest rates substantially, as urged by the Bush administration, the economists said.

Treasury Secretary Nicholas F. Brady cited the deficit-reduction package as the cause of the stock and bond market rally that occurred immediately after the accord was announced, but analysts cited a sharp drop in oil prices, which lowered inflationary pressures.

The rally ran out of steam yesterday as investors cashed in profits, and government bond prices showed only minor gains.

Economists predicted that the Fed probably would lower short-term interest rates very cautiously, perhaps by no more than a quarter-point, even if Congress adopts the budget agreement reached last weekend between the administration and congressional leaders.

Even with the new agreement, the budget deficit will still range between $260 billion and $300 billion in the current fiscal year, the economists said. Some predicted the deficit would have to be addressed again next year -- after the election.

They said a major step toward deficit reduction needed to include a reduction in the cost of Social Security and a broad-based consumption tax.

"The deficit was not cut nearly enough -- it is very disappointing," said Sung Won Sung, chief economist of the Norwest Corp. "I have talked to people on Wall Street, and that is the general reaction."

Allen Sinai, chief economist at the Boston Co., said, "A genuine dent was made in the deficit, with some real teeth in the spending cuts and tax increases, but the deficit is still going to stay extraordinarily high."

The economists said the negotiators underestimated by $4 billion the cost of sending U.S. forces to the Mideast, a point confirmed by aides to the congressional negotiators.

The administration figured the outlays for Operation Desert Shield at $11.5 billion, with $5.8 billion to be recovered from U.S. allies.

But the authorities said the cost to the Treasury would probably reach $16 billion rather than $11.5 billion, adding $4.5 billion to the deficit.

In addition, the agreement assumes that $3 billion will be raised by stepped-up tax collections by the Internal Revenue Service. In past deficit-cutting accords, however, these intensified collections have raised far less money than expected.

Increases in premiums for the depleted federal bank insurance fund were counted as raising $1 billion toward deficit reduction.

Including these premiums as revenues followed past budget procedures, but this time -- with many banks in desperate straits -- the insurance fund could become a drain on the Treasury, adding to the deficit, the economists said.

The budget agreement also includes a wide range of new tax incentives designed to stimulate economic growth, but tax experts said these incentives could turn out to be tax shelters, depriving the government of substantial revenue.

Citizens for Tax Justice, a labor-backed group that advocates tax reform, estimated that these shelters could lower government receipts by $11.3 billion over five years.

The deficit-reduction package is also premised on forecasts of virtually no growth in the economy this year and a meager 1.3 percent growth in 1991, but without the widely predicted recession.

And underlying the administration forecast is a prediction of oil prices at $24 a barrel, far below the current level of about $34.

But as a result of the sharp climb in crude oil prices, many private economists are predicting a recession in the final three months of the year -- and some believe a recession already has begun.

Every drop of 1 percentage point in economic growth over the year below the forecast will add $26 billion to the deficit because of reduced tax revenues and higher government outlays, according to the Congressional Budget Office.

"The economic forecast is not realistic," said James Solloway, chief economist of Argus Research Corp. "A recession started about two months ago. They [the negotiators] are going to have to come back next year and try again."

The Federal Reserve's policy-makers were in Washington yesterday for a meeting of the Federal Open Market Committee, but the economists doubted the closed-door deliberations would yield a reduction in short-term interest rates before Congress approves the budget.

Although the administration hopes for a full one-point decline in interest rates, the Fed probably will choose a quarter-point drop, according to David Wyss, chief financial economist at DRI/McGraw Hill.

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