Deficit Reduction

October 28, 1992|By Gilbert Lewthwaite | Gilbert Lewthwaite,Washington Bureau

The budget deficit has been the spectral issue of thi campaign, a threatening presence only rarely glimpsed.

Yet it is the major long-term problem facing the economy. If putting America back to work is the nation's first priority this election year, then keeping it there must be its second. Almost everyone agrees the deficit must be reduced if the United States is ever to prosper again.

Ross Perot, the independent candidate who has made deficit-reduction the focus of his underdog campaign, likens the deficit to the crazy aunt in the basement who everyone knows is there but no one wants to talk about.

President Bush and Gov. Bill Clinton have preferred to focus on economic growth as the prerequisite for long-term deficit reduction.

As economist Henry J. Aaron wrote in a 1990 economic treatise -- "Setting National Priorities, Policy for the Nineties" -- for the liberal Brookings Institution: "The federal deficit has been around long enough to seem normal -- and boring. While the deficit has lost its capacity to shock, it has not lost its power to damage the economy."

Two years later his words ring truer than ever. The deficit has deepened, and the country'sstruggle to escape from the aftermath of recession has been slow and painful. With less than a week to go to election day, it is time to bring the deficit into fine focus.

(defi.cit (def'asit), n., (L. There is lacking, 3d. pers. sing., pres. indic., of deficere ...): the amount by which a sum of money is less than the required amount; spec., an excess of liabilities over assets, of losses over profits, or of expenditure over income.

-- Webster's New World Dictionary

In plain English it sounds negative. In simple economics it is.

What is the budget deficit?

The deficit is the amount by which federal government outlays exceed receipts. The figure varies from year to year, but the country has routinely operated in the red for two decades.

How big is the deficit?

The Bush administration early this year estimated that the deficit for fiscal 1992, which ended September 30, would be $399 billion. In its mid-year review it reduced this to $333.5 billion, and it could turn out to be even lower when the final figures are in. The reduction is largely due to $69 billion less than expected being spent on the savings and loan bail-out. Congress refused to earmark the latest necessary funds for the latest phase of the bail-out, but the cost of closing failed financial institutions will eventually have to be met by the taxpayer, swelling some future deficit. The 1992 deficit will represent about 5 percent of gross national product, exceeding the 4.1 percent annual average of the 1980s, and more than twice the 2.1 percent average of the 1970s. The Congressional Budget Office forecasts the average ration during the 1990s will be 4 percent.

How long have we lived with an annual deficit?

There has been a budget deficit every year since fiscal 1961, with the exception of 1969, but the major explosion began in the early 1980s with the Reagan defense buildup and tax cuts.

How did the deficit grow so big?

Three basic forces have driven the deficit upward over the past 20 years: general tax cuts, increased defense spending, and the escalating cost of retirement and health care. Health care costs, as a proportion of gross domestic product (GDP), rose from 1.7 percent in 1979 to 2.7 percent in 1990. The interest costs of current huge deficits are also adding to the problem. Interest payments absorbed 1.8 percent of GDP in 1979, 3.4 percent in 1990. When the economy goes into recession, the amount of money the government can collect in the form of taxes from successful businesses and working Americans is reduced. But the cost of many programs -- unemployment benefits, for example -- continues to rise. An aging population also adds incrementally to burgeoning federal outlays. The government has to go into debt to keep itself in business.

Who is to blame for deficits?

Budget bills, which determine how much the government spends and on what, are passed by Congress and signed by the president. There is, therefore, a joint responsibility. Mr. Bush has campaigned for a line item veto that would enable him to block particular outlays in comprehensive spending bills that reach his desk, but at the moment he must either sign the entire bill or veto it. Mr. Clinton wants similar power to fillet legislation. Beyond the discretionary spending set by the budget process each year, there is a block of mandatory programs that do not require annual appropriations. They include Social Security, Medicare for the elderly, and Medicaid for the needy, and they increase automatically. Their accelarating growth is one of the major causes of modern deficits. As Richard G. Darman, the Bush administration's budget director observed in the fiscal 1993 budget document: "They just keep on going and growing automatically. Sometimes referred to as 'uncontrollable,' these programs are clearly out of control."

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