Deficit Mirrors American Spending Habits

The federal budget, a maze of enormous figures and programs--$1.233 trillion in expenditure, $1.170 trillion in revenue--and endless arguments about the deficit, are more than most people can understand or care about.

But a look at page 25 of this year’s 1,500-page federal budget would open your eyes. It would tell you why your living standards could be headed lower unless something is done to bring down deficits--slated to be $63 billion, and possibly much more, in this budget--and increase savings.

Beginning on page 25, in a section titled “Increasing Saving, Investment and Productivity” the government candidly admits that it is living beyond its resources. But it’s not only the government. The lesson of this budget document is that consumers borrowing to the hilt and companies buying each other for no money down are also living beyond their resources. So is a country that imports more than it exports, and a government that tries to meet a chorus of demands by borrowing money at home and abroad.

What the budget document says clearly is that the reckoning has come. Business as usual won’t do. Rather the nation needs higher economic growth if it is to meet “major challenges in the coming decades.” If the United States is to increase living standards, compete in international markets and pay pensions and medical costs for the great surge of retirees expected in the next century, it must have higher savings.

“Without savings no resources would be available for investment,” says the Bush Administration’s budget, and then goes on to blame the federal deficit for the low U.S. savings rate. When the government sells Treasury bonds to finance the deficit, it uses up part of the supply of private savings that might have been available for other investments, the Administration explains. The consequences have been high interest rates, diminished business investment and the prospect of lower economic growth.

The Administration even presents a chart comparing Canadian and U.S. savings rates, with the explanation that Canadian rates are higher because Ottawa gives generous tax deductions for retirement savings similar to “the deductible IRA plan that was in effect between 1982 and 1986 in the United States”--and that Washington took away from many American taxpayers in 1986.

But that doesn’t mean that Americans are about to get back their deductible IRA--the Administration’s new Family Savings Plan is a pale reflection of that former savings incentive. The simple fact is the government can’t afford to give tax breaks for savings when it is already scratching for every dollar of revenue and borrowing from foreign countries to finance the deficit.

So why not cut the deficit? Because that’s easier said than done; the deficit is not an abstract thing, but the spillover of a river of expenditure flowing through the economy, affecting every American directly and indirectly.

Almost $600 billion in the budget for fiscal 1991--the year beginning Oct. 1--goes for payments to individuals, whether pay, pensions or Medicare. The other $600 billion produces and maintains everything from airplanes to space capsules, from post offices to hospitals--and military bases around the country.

And that brings us to the crux of the matter: that the cause of the federal deficit is not the government bureaucracy but rather the lack of priorities and discipline of the American people in the expenditure of their tax dollars.

If investment plans are to be realized, says the Administration, then “someone must forgo additional current consumption.” But who wants to volunteer to forgo? Does any community volunteer to close its army base or its hospital or one of its schools?

There’s a similar lack of discipline in the country that will not do without imports, heedless of the dollars it is sending overseas--but worried when those same dollars are borrowed back to finance the budget deficit. The worry is that Japan will cut the money off.

But Japan is caught up in this vicious circle too, explains Deborah Allen of Claremont Economics Institute. “Japan takes in $60 billion in surpluses--and if it kept them in its own economy, there would be inflation.” So the surpluses are sent back to the only economy capable of absorbing such sums, the United States.

But borrowing from Japan is creating serious political problems and can’t go on much longer. And the use of temporary surpluses in the Social Security Trust Fund--without which fiscal 1991’s projected deficit would be $137 billion instead of $63 billion--is now scheduled to come to end in two more years, at the latest.

The real worry then is that if nothing is done to reduce deficits and bring greater discipline to spending, the federal government will have to find more things to tax at home. Four years ago, tax experts thought of taxing the cash buildup in life insurance policies; other nations have simply levied an annual tax on wealth--meaning an annual tax on the value of one’s house.

That would wake people up to the connection between their personal finances and complex national economics, to the fact that a nation that lives beyond its resources is everybody’s business.

Candidly and clearly that is what the federal budget is talking about this year.