Reagan’s Final Budget : Bush Facing Hard Struggle as Reagan Revolution Ends

The $1.15-trillion federal budget that President Reagan sent to Congress Monday marks the final shot in the widely touted Reagan Revolution. Now it is left to President-elect Bush to reap the benefits--and pick up the pieces.

Although both Bush and the heavily Democratic Congress are certain to change major elements in Reagan’s blueprint, neither can escape his shadow. During his eight years in office, Reagan profoundly altered both the makeup of the federal budget and the politics of budget-making in the United States.

Although Reagan’s new budget allows Bush some maneuvering room, his over-all legacy makes it substantially more difficult for Bush to achieve one of his goals--balancing the budget without raising taxes. Bush will have no easy options left: Reagan has already made most of the spending cuts that Congress will accept without a fight.

Domestic Spending Shrank

Defense spending ballooned during the early Reagan years, while the share of the budget devoted to domestic programs shrank sharply. Grants to state and local governments virtually dried up.

With the huge tax cuts of Reagan’s first year, the budget deficit mushroomed. Both Congress and the executive branch have been forced to respond--sharply shifting the political calculus of federal spending.

Congress, once seemingly oblivious to the impact of federal spending actions, now is terrified of approving new programs that would bust the budget. Senate rules even require that the lawmakers make room for new programs by cutting outlays elsewhere or raising taxes.

And both parties are wary of failing to meet the annual deficit targets of the Gramm-Rudman law, lest automatic cuts be made in government programs virtually across the board. Although Reagan did not design the Gramm-Rudman procedure--and was skeptical of it at the start--the political pressure he exerted helped prod Congress into adopting it.

Law a Public Benchmark

“Whatever people thought of Gramm-Rudman initially, it has now become a kind of public benchmark against which Congress’ performance is going to be measured,” said William A. Galston, a Democratic policy analyst who until recently was with the Roosevelt Center for American Policy Studies. “I don’t think Congress can get out of that very easily.”

Moreover, Republicans, who for years reserved their best stump speeches to lambaste the Democrats about red ink, have come to love the outsized deficit because it helps frighten Congress away from voting new spending programs. In effect, says Lawrence Kudlow, a Reagan budget strategist during the early 1980s, maintaining large budget deficits has become the GOP’s new weapon of choice for restraining spending.

The Reagan Revolution, such as it was, has left behind a whirlwind that Bush and his new budget chief, Richard G. Darman, will be forced to reap:

--Reagan’s curtailment of domestic spending has squeezed marginal programs significantly, but it has left the huge government benefit programs, such as Medicare and Social Security, pretty much intact.

More Savings Hard to Find

“All the things that are politically acceptable have been done,” said Herbert Stein, President Richard M. Nixon’s economic adviser and now a fellow at the American Enterprise Institute. If Bush wants to find further savings, Stein said, he will have to tackle at least some of the politically sensitive benefit programs.

--Reagan’s defense spending surge already has been reversed, limiting Bush’s ability to make cuts in that part of the budget. The share of the nation’s output devoted to military spending actually has shrunk since fiscal 1987.

Compared with the budgets of the John F. Kennedy Administration, said Michael Barker, a Democratic economist, Reagan “has devoted not very much to defense and has devoted far more to social programs.” By 1992, current projections show, defense spending will dip to around 5% of total economic output--about the same as in the Jimmy Carter Administration.

--Bush’s pledge of “no new taxes,” an extension of the one that Reagan made in 1984, may be politically useful in prodding Congress to trim spending, but it will make compromise more difficult. The Democratic Congress will not move on any tax increase unless Bush endorses it first. And many economists, doubting that Bush can reduce the deficit sufficiently without a tax hike, fear that the new President may have boxed himself in.

Must ‘Hang Tough’

“Bush has to hang tough for at least the first year,” Galston said. “If he caves in before that, it would fundamentally undermine his credibility.”

--A pent-up demand has developed for billions in new government spending, especially in sectors of the economy that have been deregulated--or neglected--during the Reagan years. Bush must spend billions to sustain and replenish costly federal insurance programs for banks and savings and loan associations, for instance. He will have to spend more on nuclear weapons plants, aviation, prisons and national parks, too.

“We’ve developed a sizable backlog of needs” but little money to pay for them, said Charles L. Schultze, a Brookings Institution economist who was Carter’s economic adviser.

--Because of the huge deficits, there is little room in the budget to finance the proposals that Bush made during the campaign, such as increased spending for education or a reduction in capital gains taxes. That means the new President will have to phase them in or even delay them a year or two.

--The Reagan Administration’s long-time refusal to address either the budget deficit or the companion foreign trade deficit has left the financial markets impatient and volatile, as shown by the “Black Monday” stock market crash on Oct. 19, 1987. The dollar, for example, took a nose dive as recently as November. Analysts blamed nervousness over the deficit.

Rudolph G. Penner, former director of the Congressional Budget Office, contends that the decline in the budget deficit since 1986--$221 billion then, an estimated $155 billion last year and a proposed $92 billion in 1990--has put policy-makers “out of the danger zone.” But many analysts believe that the specter of new turmoil still provides at least some sense of urgency for the new Administration.

--Finally, the revival of inflation pressures in the economy and the stubbornness of the foreign trade deficit have heightened the possibility that the Federal Reserve may raise interest rates, both to dampen demand at home and to shore up the weakening U.S. dollar. If that happened, it would drive up the government’s interest expenses and depress economic activity, thus holding down tax revenue.

“With bad luck on food and energy prices, you easily could see inflation climb to 5.5% or more sometime later this year,” said David Hale, economist for Kemper Financial Services in Chicago. “Once you let inflation get above 5% or so, you make everybody very nervous.”

The budget Reagan sent Congress Monday represents a final effort by the outgoing President to continue for another year or more some of the trends he initiated--and to correct some earlier impressions.

Although Reagan did not call for cutting Social Security or programs for the needy, he did propose some measures to slow the rise in hospital costs under the Medicare program. And he asked for some further reductions in farm programs.

Partly to avoid charges that he has ignored the deficit, he projects balancing the federal budget by fiscal 1993.

But the record of the last eight years remains mixed.

For all of Reagan’s talk about slaying the dragon of big government, he has barely nicked it.

In fiscal 1981, when he took office, total federal spending amounted to 22.7% of the nation’s gross national product, or total output. This year, it is expected to be 22.2%, and the budget Reagan sent Congress Monday projects spending at 21% of GNP in fiscal 1990.

At the same time, Reagan has achieved some significant shifts in priorities. In fiscal 1981, when he took office, defense spending accounted for 23.2% of the budget. That soared to 28.1% in 1987 before declining to 26.2% this year.

Conversely, outlays for human resources programs--mostly direct benefit payments to individuals--took 53.4% of the budget in fiscal 1981. Today, their share has shrunk to 50.2%.

Tax Bite Barely Shrinks

The revenue side of the budget shows similar patterns. Despite the sharp cuts in income tax rates, the federal government’s tax bite is barely smaller than it was in fiscal 1981. Tax receipts that year amounted to 20.1% of GNP. Today, they stand at 19.1%, and Monday’s budget puts them at 19.3% for fiscal 1990.

But the tax burden has shifted sharply. In fiscal 1981, individuals paid 47.7% of all federal taxes through the income tax; today, they pay only 43.6% that way. The payroll tax accounted for 30.5% of all federal taxes then; that has soared, to 37.3% today.

The Tax Foundation says that the combined federal, state and local tax burden was actually greater last year than in 1980, before the Reagan tax cuts.

Corporations’ share of the tax burden has remained about the same: 10.2% in fiscal 1981, 11% now.

Kudlow, who is now with Bear, Stearns & Co., argues that Reagan’s biggest success occurred on the tax side of the ledger. The tax cuts of 1981 and tax overhaul in 1986, he said, revised the tax code and blunted the use of the tax system for advancing social goals. It seems unlikely that tax rates will rise soon.

“In that sense, there really has been a Reagan Revolution,” Kudlow asserts.

A BUDGET TIMETABLE

Jan. 9--President Reagan submits to Congress his fiscal 1990 budget, which, under the Gramm-Rudman law, must include a deficit no greater than $100 billion.

February--President-elect Bush is expected to outline his own spending priorities.

April 15--Congress is supposed to adopt a budget resolution, meeting the $100-billion deficit target, to guide subsequent spending and tax legislation.

June 15--Congress to make any changes necessary in existing laws to achieve spending cuts and revenue increases called for in budget resolution.

Aug. 25--OMB issues report on the estimated fiscal 1990 deficit, based on spending and tax legislation enacted up to Aug. 15. If the deficit exceeds $110 billion, the President issues an order cutting most domestic and defense programs sufficiently to reach the $100-billion target.

Oct. 1--Fiscal 1990 begins. If Congress still has not cut the deficit to $110 billion, the automatic spending cuts take effect.

Oct. 15--OMB issues final report, revised to account for recent congressional action. If Congress still has not trimmed the deficit to $110 billion, the President issues a final order making the spending cuts permanent.

SHIFTING PRIORITIES

Share of federal spending by category, in fiscal years. Shown in percent.

1980 ’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 Defense 22.7 23.2 24.9 26.0 26.7 26.7 27.6 28.1 27.3 Payments for individuals 47.0 47.7 47.8 48.9 46.9 45.0 45.4 46.8 46.9 Other domestic programs 21.5 19.0 15.9 14.0 13.2 14.6 13.3 11.4 11.6 Interest 8.9 10.1 11.4 11.1 13.0 13.7 13.7 13.8 14.3

‘89* ‘90** Defense 26.2 26.3 Payments for individuals 47.0 49.0 Other domestic programs 12.2 10.0 Interest 14.6 14.8

* estimate ** proposed

Source: Office of Management and Budget