THE ECONOMY : U.S. Must Act Soon to Cut Budget Deficit, OECD Says

The United States, its economy menaced by inflation, must rapidly take steps to cut the federal budget deficit after four years of missed targets, the Organization for Economic Cooperation and Development said Thursday.

In its semiannual report, OECD, a leading organization of industrialized nations, predicted that the Bush Administration will fail to meet its targets to reduce the budget deficit. It doubted whether the shortfall would be eliminated by 1993, as required by law.

It also questioned the White House’s view that U.S. inflation, which has risen sharply over the past year, is truly headed lower. The White House attributes the bulk of recent price increases to temporary spikes in oil prices.

Interest rate increases over the past 16 months have probably dampened growth enough to stabilize inflation at 5.25% in 1990, up fractionally from an average 5% this year, OECD said.

From March, 1988, to March, 1989, the Federal Reserve boosted key interest rates by three percentage points to reduce inflationary pressures.

OECD agreed with the view of some Fed board members and the White House that further rate increases could endanger the health of the economy. But it added that the Fed’s tightening risked causing only a temporary slowdown. It said wages, prices and consumer demand need to be watched closely.

Matter of Urgency

OECD, which is composed of 24 industrial nations, said Washington’s effort to contain inflation would be helped if the public sector could reduce its need for capital and allow the private sector to wean itself off foreign savings.

It is therefore “a matter of urgency” that steps be taken to cut the federal budget deficit and eliminate it by 1993.

OECD expressed disappointment with the Bush’s Administration’s action on the budget in its first six months in office.

“The recently announced agreement between the President and the congressional leaders on a budget package for fiscal year 1990 seems modest,” it said. “Substantial further action is likely to be required.”

Since the Gramm-Rudman-Hollings Balanced Budget Act of 1986 was passed, the White House has only once, aided by tax reform in 1987, come close to the law’s deficit targets, OECD said.

WORLD ECONOMIC GROWTH Key indicators for the seven leading industrialized nations: For GNP, percent change from previous half year. For inflation, annual percentage rate. Real Gross National Product

1988 1989 1990 2 1 2 1 2 United States 2.60 3.75 2.00 2.25 2.25 Japan 4.50 4.75 4.25 4.25 4.00 W. Germany 2.50 3.50 2.25 3.25 2.75 France 2.90 3.25 3.00 2.50 2.50 Italy 2.00 4.00 3.50 3.25 3.00 Britain 1.60 2.75 2.25 2.00 2.00 Canada 3.50 3.75 2.00 2.50 2.50 Inflation United States 5.00 4.75 5.00 5.25 5.25 Japan 1.30 1.50 2.00 2.25 2.25 W. Germany 1.70 3.00 2.50 2.25 2.25 France 3.40 3.25 3.25 2.75 2.75 Italy 5.80 5.50 5.25 5.00 4.75 Britain 8.80 6.25 6.00 6.00 5.75 Canada 4.60 4.75 5.00 4.25 4.25

Organization for Economic Cooperation and Development