1990 budget pact credited with curbing the momentum of a snowballing deficit

November 25, 1991|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau of The Sun

WASHINGTON -- It limits the government's response to economic hard times. It restrains Congress' urge to spend. It cramps the White House's fiscal freedom.

It is the Budget Agreement of 1990, thrashed out last year between President Bush and leaders of Congress.

It was designed to help lower the deficit, cap federal spending, check inflation, stabilize the economy, reassure the markets.

With the deficit growing, spending increasing, inflation stirring, the economy still sagging, and the markets jittery, the question is: Has it worked?

Surprisingly, the answer is a qualified "Yes." The economy, according to most experts, would be in even worse shape dTC without it.

"Murphy's law is a raging success. Almost everything that could go wrong has gone wrong," said Bill Frenzel, former Republican ranking member on the House Budget Committee and now a guest scholar in governmental affairs at the Brookings Institution.

He added: "However, if you didn't have the agreement, Congress would have spent more money, the deficit would have been greater, the credit markets would have been more nervous. So I guess I'm happier to havehad the agreement in effect."

An analysis by the Congressional Budget Office this summer came to much the same conclusion: Without the agreement, the structural deficit (the federal deficit with the effects of the recession factored out) would be $350 billion, or 4.5 percent of gross national product, in 1996, instead of the now-projected $185 billion, or 2.5 percent of GNP.

The original goal of the agreement was to reduce the deficit by $500 billion by fiscal 1995. Said the CBO in its update on the national economy: "It now appears that the main accomplishment of [the agreement] was not to reduce the size of the structural deficit but to prevent it from becoming substantially larger."

The accord built a series of all-but-impregnable walls between various sectors of the budget. The major wall separates taxes and entitlements from appropriations. This means that any tax cut or spending increase has to be financed on a pay-as-you-go basis without new funding.

If Mr. Bush wants to cut capital gains tax, he must now show how he can finance the cut from savings in existing programs or an offsetting tax increase.

Three other walls separated and capped defense, international and domestic non-entitlement spending. No funds from any one of these categories could be transferred to another during fiscal 1991, 1992, or 1993. In fiscal 1994 and 1995, the moneys for all three will be combined in a single pool, and the partisan arguments over how much should be spent on each will likely be resumed with a vengeance.

In the meantime, the only way for any of the walls to be breached is for Congress and the president both to agree that they are responding to an emergency. Congress has tried this ploy several times, most notably in its original effort to extend unemployment benefits, but Mr. Bush has repulsed the lawmakers' efforts.

In a speech last week, Mr. Bush said: "I regret that now the Democrats are trying to bust that budget agreement. . . . They can send down all the programs they want with these noble-sounding titles and I am not going to permit them to bust this agreement that's the only safeguard the taxpayer in America has."

The latest White House objection came last week when Democratic legislators moved to finance $60 billion of the proposed savings-and-loan bailout through spending cuts. Administration officials warned that such a move would break the agreement, which excluded one-time bailout spending from the pay-as-you-go clause.

The Democrats have shown their own reluctant restraint. For example, legislation to increase food stamp benefits, initially blocked by the White House last year and then re-approved by the House Agricultural Committee this summer, currently languishes while the Ways and Means Committee looks for a financing mechanism.

A sign of growing frustration with the agreement's restraints was the introduction last week of Democratic legislation to reform the budget process by breaking down the walls between defense and discretionary spending in fiscal 1993, one year ahead of schedule. This would give Congress earlier access to the so-called "peace dividend."

Introducing the bill, Representative John Conyers Jr., D-Mich., chairman of the House Government Operations Committee, which has jurisdiction over budget process reforms, said the international and domestic situations were now "dramatically different" from when the three categories were separated and capped in October 1990.

"With the end of the Cold War, the collapse of the Soviet threat, and the urgent need for investments at home, there is a need to alter this outmoded budgetary straitjacket," he said.

The agreement is widely expected to be changed after next year's election if not before, partly because the constraints on discretionary appropriations will become even tighter from fiscal 1993 onward.

"The next president and the next Congress will face unpalatable choices in meeting the discretionary spending limits for the 1994 budget," Robert D. Reischauer, director of the Congressional Budget Office, warned in recent testimony on Capitol Hill.

Stephen Moore, director of fiscal-policy studies at the CATO Institute, believes the whole agreement should be scrapped. According to his calculations, economic growth over the next five years will be 0.5 percent lower annually because of the $200 billion in extra taxes collected under the agreement.

He said: "I am not saying the budget agreement caused the recession, but I do think it was a significant drag on the economy. We would not be in such a severe recession if we had not had that big tax increase. The deficit is never going to go down under this agreement."

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