Deficit still set to grow, experts say But budget deal has new spending curbs

October 29, 1990|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

WASHINGTON -- The compromise deficit reduction package still leaves a spiraling deficit, projected to reach a record $260 billion in 1991, and little likelihood of a balanced federal budget by the mid-1990s, according to fiscal experts and private economists.

But slightly noticed parts of the new package, these analysts said, would set tough new controls on spending that in effect would supplement the Gramm-Rudman-Hollings deficit reduction law.

Congress would be required by the new system to follow through on a regular basis to keep spending in check.

"It is a complex change in the budget process, but it is going to make it difficult to add to spending or to cut taxes," said Stanley E. Collender, budget analyst at the accounting firm of Price Waterhouse. "It transfers enormous new power to the budget director, giving him almost a line-item veto."

Under the new legislation, crafted by the administration as a major part of the budget reform process, annual ceilings would be imposed on broad categories of spending. Should Congress violate those controls, the package would require, for at least the next three years, that stringent measures be imposed automatically to bring the spending back in line.

Specific limits would apply to military, domestic, foreign aid and benefit programs. Should the Office of Management and Budget find the ceilings broken, the budget director would be empowered to order cuts in those categories so that the spending cap would not be exceeded -- except to account for inflation.

After three years, the new package would allow some increase in domestic spending -- as long as the military budget was cut by a comparable amount.

The Gramm-Rudman-Hollings law set deficit targets for the entire government far in advance, but these goals were constantly ignored.

Commenting on another aspect of the new package, fiscal experts said that, although it is billed as reducing the deficit by about $40 billion in 1991 and $490 billion over five years, the budget plan is actually considerably more modest.

But in contrast to past deficit reduction bills, marked by accounting gimmicks, the current package contains genuine deficit reductions, these experts said, mainly because of its heavy reliance on taxes, which will raise about $160 billion over five years.

The actual deficit reduction was projected by these experts to range from $25 billion to $30 billion in 1991 and about $300 billion over five years.

"It is a modest package, not that big a deal in a $5 trillion-dollar economy," said Mr. Collender. "It doesn't count the cost of Operation Desert Shield at $6 billion to $7 billion, and it includes $3 billion in higher IRS collections that won't happen."

The package also rests on optimistic assumptions that no recession will occur. It also assumes that economic growth will expand rapidly starting in 1992, fueled by steady declines in interest rates set by the Federal Reserve Board.

Budget planners are counting on the economy to expand at a robust 4 percent annual rate from 1992 through 1995, far above the anemic levels of the past year. They are also forecasting that long-term interest rates will fall substantially, from a peak of 8.7 percent this year to 5.3 percent in 1995.

But because of the slimmed-down size of the package and caution by the Federal Reserve as a result of the inflationary pressures from oil prices, most economists expect that the central bank will lower short-term interest rates only gradually.

"This is a very modest package," said David Berson, chief economist of the Federal National Mortgage Association, "and the Fed, because of its general caution, is unlikely to lower rates right away by more than a quarter of a point."

The administration had hoped that a budget deal would yield at least a prompt decline of a full percentage point, to give a strong impetus to the flagging economy.

The financial markets, deeply concerned about the climb in oil prices and the possibility of war in the Middle East, shrugged off the budget package late last week after the plan was approved by Senate and House conferees.

Economists expect that the higher taxes and cuts in defense and other spending incorporated in the package will be a slight drag on the economy over the next year.

But they also predict that, in the long term, the budget package will improve the economy moderately by lowering interest rates.

Deficit cuts of the size contemplated generally hurt the economy initially: Tax increases draw away funds that consumers might ,, otherwise spend, while the government is reducing its spending. But it generally takes months for any rate reductions by the Fed to lift the economy.

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