Boskin Predicts Interest Rates Will Decline : Bush’s Chief Economist Sees Deficit Determining How Far They Slide

President Bush’s chief economist said Thursday that he expects interest rates to come down “substantially” later this year despite a growing consensus among private economists that they will stay the same or perhaps even rise.

Michael J. Boskin, the Stanford University economics professor whom Bush has named to head the Council of Economic Advisers, made the prediction at a hearing of the Senate Banking, Housing and Urban Affairs Committee, which is reviewing his nomination.

How much interest rates decline, Boskin said, will depend mainly on how successful Congress is in reducing the federal budget deficit this year and next. Under current law, the lawmakers must slash the fiscal 1990 deficit to $100 billion or automatic spending cuts will be triggered.

Boskin’s latest forecast is interesting because the prediction that interest rates will decline this year has become the most controversial element of the budget plan that the Bush Administration is inheriting from its predecessor.

The level of interest rates that the Administration assumes has a direct effect on estimates of how much the government will have to pay for borrowing each year. Analysts say that if the budget assumes higher interest rates, the estimated deficit becomes higher, requiring a larger reduction.

Most analysts believe that the Reagan Administration’s interest rate predictions were far too optimistic--particularly in view of assertions by Federal Reserve Board Chairman Alan Greenspan earlier this week that interest rates are apt to rise.

‘Reasonable’ Prediction

Although Bush officials have indicated that they plan to accept the Reagan economic forecast as is, Boskin declined to commit himself to that firmly, saying that Bush had accepted the Reagan figures only “for the time being” and is working on some of his own.

Nevertheless, he asserted that a Reagan Administration forecast that interest rates on 90-day Treasury bills will fall later this year to 6.3%, from 8.3% right now, is “reasonable” and “in the range of possibility” if Congress reduces the budget deficit quickly.

Boskin called reducing the budget deficit the nation’s “No. 1” economic priority. Expectedly, he endorsed Bush’s proposed “flexible freeze” on spending--a plan that seeks to keep government spending on average growing no faster than the rate of inflation. Boskin, as an economic adviser to Bush’s presidential campaign, originated the idea of a “flexible freeze.”

Boskin is expected to have no difficulty winning Senate confirmation as council chairman. The 43-year-old Stanford professor received high praise from both Republicans and Democrats on the panel. The committee is slated to vote on the nomination sometime next week.

During his testimony Thursday, Boskin also endorsed in principle the idea of eliminating the current “double taxation” of business income both as corporate profits and as dividends to stockholders, but only if backers could find a way to prevent widening the budget deficit.

He also warned lawmakers not to act too hastily in taking steps to rein in leveraged buyout transactions.