Behind the budget:
Baruch, Jeremiah
Washington report BEHIND THE BUDGET A DEFICIT BY ANY OTHER NAME SUPPOSE YOU are an adviser to a politician who made a 1980 campaign promise to balance the budget in fiscal 1983. By February 1981...
...Have the federal government cease all payments to states and local governments, leaving the government only to pay for national defense, interest on the debt, and direct payments to individuals...
...Politically, the first step in solving such a problem is to determine precisely where the problem is...
...A poor economy produces lower tax receipts and increased outlays for programs sensitive to the unemployment rate (e.g., unemployment benefits, food stamps, etc...
...The debate will be waged throughout the decade...
...The committee acknowledges that real defense spending declined from 1970 to 1981, but notes the role of the Vietnam war at the start of the decade and observes that from 1972 to 1981, total defense spending remained level in real terms...
...that which is left over as a result of taxing and expenditure policies is the "structural" deficit...
...They contend that the causes of the structural deficit started in 1981, the year, coincidentally, Mr...
...The Economic Report of the President, transmitted to the president at the same time, states that, "approximately one-half of the 1983 budget deficit is due to the depressed state of the economy...
...But such a disparity of accounts between the President's Budget and his Economic Report pales in comparison to the difficulty in explaining the causes of the structural deficit...
...Guess what - there would still be a deficit...
...Or as one economist wryly observed, if one accepted the depiction of the deficit in the president's budget, one would conclude we have no recession...
...but the all-important beginning of the struggle will take place this spring in the 98th Congress...
...The Congressional Budget Office, in perhaps the most politically neutral of all explanations, begins its assessment by tracing patterns of the deficits from 1947...
...CBO identifies the main cause of this declining ratio - the Economic Recovery Tax Act of 1981, aptly named by the Washington Post the Great Potlatch of 1981...
...CBO observes that federal spending as a proportion of GNP remains very high by historical standards - higher than in any postwar year before 1982 - "largely because of the build-up in defense spending, rising interest payments, and the growth of entitlement programs ." Yet CBO focuses its concerns, as do the president and Congress, on the five-year projections of the deficit - where revenues show a relative decline from 20.9 percent of GNP in 1981 to 18.3 percent in 1988...
...Reagan took office...
...Naturally the House Budget Committee has its own perspective...
...Most economists agree that a continually rising deficit during an economic recovery could harm that recovery by drawing funds away from business investment to finance the large deficit...
...The president is thus able to explain his structural deficit as an "inherited'' burden in light of an urgent need to increase defense spending...
...What do you advise him to do...
...The Office of Management and Budget traces the development of the deficit back to 1963, citing the incremental expansion of the "social contract" (Social Security, Medicare, and Medicaid...
...Together, this "rapid growth" in non-defense spending - to about 10 percent of GNP - is seen by OMB to have been at the expense of defense, which has been reduced, lamentably, from 8.3 percent of GNP in 1970 to 5.5 percent in 1981...
...It is a question of how to handle a structural deficit which is self-sustaining and, if unstopped, forever burgeoning...
...however, economic feasibility does not translate into political feasibility...
...The task of dealing with the structural deficit in our nation's budget, however it is understood or interpreted, will not disappear soon...
...During the same period, the revenues the government would have received had there been six percent unemployed (a calculated figure known as "standard employment" revenues) fell from 21.0 to 18.6 percent of GNP, and "standard employment" domestic spending fell from 14.2 to 13.5 percent of GNP...
...The President's Budget for Fiscal Year 1984 declares that for 1983 ,"31 percent of the deficit is cyclical in that year, and 69 percent structural in nature...
...The Congressional Budget Office, established by Congress for relatively objective information in just such situations, points out that "roughly two-thirds of the 1983 deficit appears to be the result of economic slack...
...Everyone knows that deficits are made worse by recessions - a severe recession even more so...
...Now he has to submit his fiscal 1984 budget with a projected deficit of over $200 billion...
...The enormity of the problem facing the president and the Congress is perhaps dramatized by the following: Close down the entire non-defense operations of the federal government - the National Park Service, the FBI, the FAA, even Congress...
...JEREMIAH BARUCH (Jeremiah Baruch is the pseudonym of a Washington writer with a position in government...
...By February 1981 he had extended the promise to fiscal 1984...
...Washington is beginning to come to grips with this problem of the deficit...
...Blame someone, blame anyone, or take the heat...
...OMB then points to the growth of entitlement programs (e.g., Aid to Dependent Children, federal retirement and disability programs) during the seventies, as the foundation of the problem...
...Further, it emphasizes that between 1981 and 1984, defense spending increased from 5.4 percent of GNP to 6.7 percent, net interest payments to finance the deficits rose from 2.3 percent of GNP to 2.8 percent...
...The Budget Committee concludes, "Clearly the structural changes in policy driving up the deficit between 1981 and 1984 are the administration's rapid defense build-up, massive tax cuts, and the interest payments needed to service the huge government debt issued to 'pay' for them...
...However, it is no longer just an investigation into how much of the present deficit is cyclical - that is, due to the recession - and how much is structural...
...No one is disagreeing about what the options are, but they surely disagree over which ones to choose...
...The debate focuses on revenue increases versus revenue decreases, defense hikes versus defense cuts, entitlement maintenance versus entitlement revisions...
...These cyclical fluctuations in revenues and spending are that part of the deficit which is depicted as "cyclical...
...Moreover the projected deficits are seen to be a factor in the current high long-term interest rates and a stimulus which conflicts with an anti-inflationary monetary policy...
...in government...
...In other terms, the structural deficit is that which exists even if one were to assume full employment and high economic activity...
...Budget problems, as in politics in general, afford numerous alternative solutions...
...Swallow hard, there is no easy answer for this one...
Vol. 110 • March 1983 • No. 5
