Annual Budget Game Under Way

Well, here we go again. Another stillborn budget has been presented by an intrepid President to an intransigent Congress. The now toothless Gramm-Rudman deficit reduction law continues to be honored in the breach, and the President says we will meet the fiscal 1988 Gramm-Rudman targets without tax increases. I think this is about where we started this process the same time last year. The difference is that, back then, the Senate was controlled by the Republicans and the Reagan Teflon factor was still in full sway.

Things are different today. The White House is gripped by the Iran- contras crisis; the President’s popularity is under a cloud, to say the least, and the Senate belongs to the Democrats. Further, we have passed another piece of tax legislation, the economic and federal revenue implications of which are by no means clear.

We recently closed fiscal 1986 with a record deficit of more than $220 billion after saying originally that it would be only $180 billion. It should come as no surprise that there is rampant skepticism about the federal budget process.

As well there should be. It’s the rule rather than the exception lately that we miss the national budget by a country mile and always in the same direction. The Administration tends to overstate revenue because of its desire to project a vigorous economy. Congress always underestimates expenditures. That’s a lethal combination with a doubly negative effect on the size of the deficit. And it has been going on this way for more than 20 years, as the accompanying chart shows, except that these days the whole process has taken on a more openly cynical tone.

The relevant way to measure the size of the budget deficit is to examine it relative to the size of the economy--that is, as a percent of gross national product, as shown. One can make the following observations:

- The deficit appears to be rising immutably, regardless of the party in power. Moreover, the federal budget deficit is near a record high relative to GNP despite four consecutive years of economic expansion and six years of gnashing and wailing over budget “cuts.” That has rather frightening implications for the future.

- Deficits rise the year before a presidential election. (Presidential election years are denoted by short vertical lines.) The only exception during the past 30 years is 1959, the year before the Republicans, the party in power, lost the election on economic issues. Rising deficits tend to stimulate the economy, creating jobs, incomes and contented voters. Get the picture? I don’t need to remind you that this is the year before the next presidential election.

Before we get too carried away by this dismal picture, we need to ask ourselves two questions: Is it likely that the deficit actually will go on this way? Does it really matter? Indeed, there does seem to be a sea change recently in informed opinion about the direction of the budget deficit. The combination of steady albeit relatively slow economic growth, low interest rates and the psychological restraint on spending habits of the Gramm-Rudman law may be converging to shrink the deficit over time. That remains to be seen, however. Several things could knock the optimism into a cocked hat, among them a recession or rising interest rates. Furthermore, estimates of the revenue impact of the Tax Reform Act of 1986 are only guesses. To give you some idea of the effect of an unexpected recession on the deficit, when the fiscal 1983 budget was first proposed in January, 1982, the deficit was projected to be $107 billion. The actual deficit was $208 billion.

Whether the deficit matters is a topic of fierce debate these days with good minds on both sides of the issue. I think that one of these days the intellectuals will figure out that the budget deficit does matter and that it is connected in one way or another to the burgeoning trade deficit, to interest rates, to inflation and to anemic private savings and investment levels. Let’s hope they do it before it’s too late. Until then, unfortunately, no one will be inclined to take it seriously, except perhaps you and me.