Spending Cut or Tax Hike: Effects Similar, Panel Told

The National Economic Commission, trying to break the seven-year deadlock over huge budget deficits, was told Wednesday that it matters little to overall economic performance whether the deficit reduction comes from spending cuts or tax increases.

The high-level advisory panel received a study prepared by the Congressional Budget Office that showed a full-scale assault on the budget deficit will not cause a recession as long as the Federal Reserve helps out by lowering interest rates to offset the reduced federal spending.

The budget office report rejected arguments often raised by critics that the current economic recovery could be thrown into a recession if the budget deficit is brought down too rapidly or if politicians rely too heavily on tax increases to close the gap between revenues and spending.

Commission co-chairmen Robert S. Strauss and Drew Lewis said they believed the budget office report showed that the commission had wide leeway from an economic standpoint in selecting a mix of spending cuts and tax increases to close the budget gap.

But they said the economic models did not take into account the political realities of crafting a package acceptable to Congress and President-elect George Bush, who has vowed to reject any new taxes.

“We are right where we were at first. The problem is 10% economic and 90% political,” Lewis said.

The deficit panel was created by Congress a year ago to provide advice to Congress and the President-elect on ways to eliminate the federal budget deficit, which climbed to $155.1 billion in the fiscal year that ended on Sept. 30.

The budget office ran four types of deficit reduction efforts through computer simulations of the U.S. economy to see what the impact would be.

All of the options would achieve deficit cuts of $120 billion to $130 billion by 1994 but would arrive at that goal in different ways. One option got all of the reductions from domestic programs, exempting Social Security and defense from any cuts. This proposal also ruled out any tax increases.

At the other extreme, a fourth proposal got half of its deficit savings from cuts in defense, Social Security and other entitlement programs and other domestic programs and the other half from higher taxes.

Fred Ribe, assistant director for fiscal analysis for the budget office, said the various computer models showed little difference on economic growth regardless of the mix of spending cuts and tax increases that were used.