Deficit Figures Signal Need for Gramm-Rudman Cuts

The White House budget office indicated Wednesday that Congress is falling short of its fiscal 1987 target for reducing the federal deficit and must face the prospect of making the painful and indiscriminate spending cuts set forth under the Gramm-Rudman deficit-reduction law.

The Administration forecast also that the deficit for the current fiscal year, which ends Sept. 30, will reach $230.2 billion, an increase of $30 billion over its projection last February and a figure that would represent the largest one-year splurge of red ink in the nation’s history.

The Congressional Budget Office is expected to agree today that the fiscal 1987 deficit will exceed the target established under Gramm-Rudman. The preliminary forecasts of the budget offices are not expected to change significantly before their judgments become final Aug. 15.

The White House Office of Management and Budget based its prediction on a new Reagan Administration economic forecast. Although the economy’s growth has not lived up to expectations for this year, the economists said, they nonetheless expect it to spurt ahead in fiscal 1987, which begins on Oct. 1.

Beryl W. Sprinkel, chairman of the President’s Council of Economic Advisers, said growth in 1986 will probably be only 3.2% after adjustment for inflation, down from the 4% estimate it made at the end of last year. For the first half of the year, the economy has grown at an annual rate of only 2.4%.

The slower growth will depress income tax revenue, it said, and thus cause the $30-billion bulge in the 1986 deficit.

However, the Administration projected that growth would rebound next year to 4%.

Budget Director James C. Miller III said the new economic projections indicate that his office will forecast a fiscal 1987 deficit “a little over $154 billion” on Aug. 15, when it is required to project spending and revenue for the next fiscal year.

Under the Gramm-Rudman law, anything more than $154 billion would trigger automatic spending cuts deep enough to bring the deficit down to $144 billion, next year’s Gramm-Rudman target.

The CBO, which must also estimate the size of next year’s deficit based on spending and tax laws on the books as of Aug. 15, has confirmed that its economic forecast, to be released today, suggests an even greater deficit of $173 billion.

Estimates Averaged

Under Gramm-Rudman procedures, the OMB and CBO estimates are to be averaged, and that figure apparently will be at least $164 billion. That would require about $20 billion in spending reductions, equally divided between defense and domestic programs and coming equally out of all programs except for Social Security and a handful of others that Congress exempted.

Although the law originally would have required that the cuts occur automatically, a recent Supreme Court decision requires Congress to vote whether to make the reductions. If it does vote to live within the law’s guidelines, Congress would then have several weeks to scramble for additional deficit-reduction measures that would help it avoid the cuts that would take effect in early October.

OMB’s Miller said that Congress stands a good chance of dodging Gramm-Rudman’s automatic cuts if it passes more than $9 billion in fiscal 1987 deficit-reduction measures required under its own budget resolution.

However, committees in both the House and Senate have come up short in their early efforts to find the savings. Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) said Wednesday that he probably will put off action on the deficit-reduction legislation until September, when Congress returns from its August recess and knows for certain the size of the Gramm-Rudman cuts.

sh Criticizes Forecasts

House Budget Committee Chairman William H. Gray III (D-Pa.) suggested that OMB had used unreasonably optimistic economic forecasts to make the shortfall appear less than it actually is.

He added that the projections should make the House leery of a Senate-passed proposal to restore the law’s automatic-cut mechanism, which was struck down by the Supreme Court, by giving to OMB the power to order the reductions.

The court objected to the original plan on the grounds that it violated the constitutional doctrine of separation of powers by allowing the comptroller general, who is accountable to Congress, to issue orders to the executive branch.

Overall, the White House’s midyear projections, which officially serve as the basis for its budgetary decisions, show the economy “poised for a resumption” of healthy growth, Sprinkel said. The same forces that slowed it to a disappointing 1.1% annual rate in the second quarter, he said, will help boost it next year.

Sees Oil Benefits

For example, he said, the short-term effects of lower oil prices have been negative as they have sent the oil industry into a slump, but the long-term benefits of lower-cost energy to other businesses and consumers will soon begin to have their effect on the economy. Similarly, he said, a weaker dollar will eventually help chip away at the record trade deficit.

The Administration boosted its unemployment forecast for 1986--to 6.9%, from the 6.7% rate it projected last December--but continued to predict that it will decline to 6.5% in 1987.