President to Unveil $1.2-Trillion Budget, Needs Lower Interest Rates to Meet Goals

Even before President Bush unveils today his $1.2-trillion spending plan for the federal government for the coming fiscal year, his budget director acknowledged that he does not expect to achieve the balanced budget in 1993 called for by the Gramm-Rudman deficit reduction law.

Asked in an interview Sunday on NBC’s “Meet the Press” whether he is confident of reaching the 1993 target in his own budget, Budget Director Richard G. Darman replied: “No.”

He went on to explain: “You’re dependent . . . on the economy and we don’t control that unilaterally. The Federal Reserve has an important role to play and you’re also dependent on congressional action.”

Darman’s comments highlight an economic Catch-22 that confronts the White House: The Bush Administration needs dramatically lower interest rates and somewhat stronger growth to achieve its budget goals, but the optimistic economic goals themselves are not reachable unless Congress and the White House agree on how to cut the deficit. So far, Darman has not found a way out of this dilemma.

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‘Worst of All Worlds’

“We’re in the worst of all possible worlds,” contends Michael Evans, president of an economic forecasting firm here. “Interest rates are going up; growth is going down.”

Federal Reserve Board Chairman Alan Greenspan has repeatedly suggested that interest rates could drop by as much as two full percentage points, helping to stimulate additional growth and private investment, but only if the deficit is cut enough to substantially reduce the need for federal borrowing. Until something like that happens, Fed officials say, it would be risky to allow interest rates to fall because of the danger of reviving higher inflation.

As reported earlier, Bush plans to present spending proposals to Congress that will call for slashing next year’s deficit to just under $64 billion--almost half the level expected during the current fiscal year. His budget contains roughly $37 billion in proposed spending cuts and revenue increases.

Like all White House budget documents, Bush’s first full-scale statement of his priorities for the federal government serves as the opening shot in the coming election-year battle with Congress over fiscal policy and politics.

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‘Lot of Hypocrisy’

Darman on Sunday assailed what he said was “an awful lot of hypocrisy” and “posturing” by lawmakers about the Administration’s plans.

“We’re about to start an annual ritual, which is regrettable,” he said. “Our budget will be criticized unfairly. People ought to sit down and do serious work.”

The White House, in its economic forecast to be presented as part of the budget, is expected to predict that real economic growth will slow to a rate of 2.6% this year before jumping back to a more robust growth rate above 3% from 1991 through 1994.

But only last Friday, the Commerce Department reported that the economy slowed virtually to a halt late last year. Although many analysts expect growth to pick up from the dismal 0.5% rate of the fourth quarter of 1989, some others are forecasting a recession and few economists are counting on much more than sluggish growth in the months ahead.

Slower growth has an impact on the budget deficit by undermining the rise in government tax revenues that comes from putting more people to work, from higher personal incomes, and from fatter corporate profits. The White House is forecasting an $84-billion increase in revenues in fiscal 1991 due to the economic growth it projects.

Interest Creeping Up

Even more critical to the Administration’s hopes of reducing the deficit is its forecast that interest rates will drop substantially. The White House is expected to project that short-term interest rates will fall from an average of 8% in 1989 to 4.4% by 1994, while long-term borrowing costs will plunge from 8.5% last year to 5.4% in 1994.

Unfortunately, interest rates have started to creep up again after falling for much of last year, with short-term Treasury bill rates at about 7.7% last week and long-term bonds averaging 8.6%.

Interest rates are especially important because the federal government has nearly $3 trillion in outstanding debt and is expected to pay more than $175 billion in interest alone this year. As a rough rule-of-thumb, whenever interest rates average 1% higher than predicted, the federal budget gap widens by at least $11 billion within a year and by even greater amounts in subsequent years.

Privately, Bush economists defend their growth forecast as reasonable but admit their interest rate expectations are wildly optimistic, said Jeffrey A. Eisenach, a former top official at the Office of Management and Budget who prepared a recent independent budget analysis for the conservative Hudson Institute.

Unrealistic Targets

Darman, while conceding his budget targets are unrealistic, sought to turn the spotlight to broader questions of economic growth.

“Instead of debating exactly what the deficit number is going to be,” Darman said Sunday, “what we ought to debate is what does it take so the economy (can) grow the most.”

Lawmakers regularly decry the White House’s unrealistic budget assumptions.

“It has become obvious to all concerned that the Office of Management and Budget consistently underestimates the deficits,” Sen. Jim Sasser, the Tennessee Democrat who heads the Senate Budget Committee, said last week, “by resorting to the most optimistic economic assumptions it can credibly--and now sometimes even incredibly--employ.”

But Congress invariably ends up adopting the same rosy economic assumptions as the White House in its own formulations. That’s one key reason why the government continues to fall far short of its professed deficit achievements.