But if Reagan’s Wrong on the Economy, Congress Is in Trouble : Accord Seen Halting Battle of the Budget

If all goes well, something new could be in store for Congress this year: peaceful coexistence with President Reagan over the fiscal 1989 budget that Reagan proposed to Congress Thursday.

Looming over this vision, however, is the threat that the economy will be much more lethargic than the White House predicts. That could propel the estimated 1989 deficit upward and trigger another gut-wrenching round of budget cuts.

For now, the budget’s course for next year was largely determined by the budget “summit” agreement reached by Congress and the Administration last November. The two sides agreed to budget cuts based on the assumption that the economy will perform as the Administration projected Thursday--a mild, brief slowdown during the first half of this year and a rebound of sorts in 1989.

Painful Additional Cuts

But many private economists are predicting a more severe slowdown, one that could easily bloat the deficit by $25 billion to $40 billion for fiscal 1989, which begins Oct. 1. That, in turn, would force the lawmakers to consider a spate of additional--and painful--budget cuts in August if they want to keep their deficit reduction targets intact.

“Everything hinges on the state of the economy nine months from now,” said Sen. Phil Gramm (R-Tex.), co-author of the Gramm-Rudman budget law, which set the deficit reduction targets. Even small differences in the economy’s performance can produce large changes in expected tax revenues and projected spending for unemployment benefits and other public services.

Congress’ first--and quite possibly successful--line of defense will be a bipartisan effort to push the budget brouhaha off to the next President next year. This means continuing to accept the Administration’s optimistic economic forecast as accurate, regardless of the economy’s actual course.

“The whole strategy is one of postponement,” said Rep. Leon E. Panetta (D-Monterey), a senior Democrat on the House Budget Committee and most likely its next chairman. “Nobody wants to face a budget crisis a month and a half before the election.”

But the battle could be forced in early autumn if the Administration’s forecast proves to be too wide of the mark to portray as credible. In that case, the lawmakers would be forced to approve more-painful spending cuts and tax increases or--perhaps almost as embarrassing politically--to abandon their deficit reduction targets.

May Abandon Targets

“If there were a bipartisan consensus in August that the economy would be hurt if we attempted to meet the targets, then it would be insanity to go ahead with that effort,” said House Majority Leader Thomas S. Foley (D-Wash.), also a member of the Budget Committee.

The outlook is muddled even further by the spate of ambiguous and sometimes confusing rules that the lawmakers and the courts have laid down for the budget-making process:

--Under the Gramm-Rudman law itself, Congress set a deficit target of $136 billion for fiscal 1989--slightly more than the $129.5 billion in the budget proposed by Reagan. If it appears next August that the deficit is going to exceed the target by more than $10 billion, the law gives Congress time to enact spending cuts and tax increases sufficient to hit the target.

If Congress fails, the Administration must make up the difference automatically with across-the-board spending cuts that ostensibly hit all programs equally. The reckoning time occurs next August, when Congress is required to take a “snapshot” of the budget situation and take whatever action is necessary to meet the Gramm-Rudman targets.

--But the automatic spending cuts will not apply if the economy has grown by less than 1% for two consecutive quarters or if the government projects two quarters of zero growth--effectively a full-fledged recession. A court ruling last year decreed that the budget calculations would have to be based on the Administration’s economic assumptions, not those of the nonpartisan Congressional Budget Office.

--At the same time, there is a serious dispute over how far the White House and Congress are obliged to go in carrying out the deficit reduction agreement they negotiated last November, in the wake of the Oct. 19 stock market crash.

Spending Cuts, Tax Hikes

According to the pact, the two sides agreed to enact $76 billion in spending cuts and tax increases over the next two years to help meet the Gramm-Rudman targets--$30 billion in fiscal 1988 and $46 billion in fiscal 1989. So far, Congress has approved deficit-reducing measures totaling $34 billion for fiscal 1988 and $36 billion for fiscal 1989. It still has several more proposals on which it must act.

“It’s an unbelievable mess,” said Rudolph Penner, former director of the Congressional Budget Office and now an analyst at the Urban Institute, a Washington research organization. “I’ll be the first to admit that I don’t understand Gramm-Rudman and what it requires.”

Adding to the confusion is the uncertain reaction of financial markets around the world to Congress’ budget decisions. Rightly or not, much of the markets’ nervousness before last October’s stock market crash was attributed to investors’ concern about the runaway budget deficit. Some strategists worry that abandoning the deficit reduction targets too soon could well send the markets into another tailspin.

Happily for the lawmakers’ short-run needs, the Administration’s latest forecast is at the more optimistic end of the range of public and private predictions.

The White House is predicting that the economy will grow by about 2.9% this year after accounting for inflation--compared with 3.8% in 1987--and then edge up to 3.1% growth in 1989. It expects the nation’s unemployment rate to average 5.8% in 1988 and fall to an average of 5.6% next year.

Sluggish Growth Seen

Other forecasters are not as confident. The Congressional Budget Office, for example, predicts that overall economic growth will slow to a sluggish 1.8% this year and climb back only to an average 2.6% in 1989. That would send the jobless rate up to an average of 6.2% in 1988 and 6.1% in 1989.

Most private forecasts tend to be closer to that point of view. So far, however, the economy has been performing reasonably well.

And for now, lawmakers are counting on the White House Office of Management and Budget to rescue them in August by continuing to hew to the optimistic forecast it issued Thursday.

“If the economy only goes a little bit soft, OMB will bail us out,” said Rep. Charles E. Schumer (D-N. Y.), a House Budget Committee member. “We’ll be able to put off any new budget summit until the new President takes office.”

Off the Hook in a Slump

And the lawmakers are off the hook--at least on the deficit reduction issue--if the economy falls into a recession and the Gramm-Rudman targets are suspended.

Something in between a recession and solid economic growth could be the worst of all worlds for the election-conscious lawmakers.

“Come August,” Penner warned, “it will be difficult for OMB to be optimistic enough.”

Staff writers Paul Houston and Tom Redburn contributed to this story.