Analysts Doubt That Plan Would Yield Balanced Budget by Mid-'90s : Deficit: They say the latest package relies on unrealistic economic assumptions. Many are also skeptical about a big drop in interest rates.
It took nine months of endless squabbling and then a prolonged, agonizing delivery before Congress and the White House finally found themselves ready to enact a budget agreement this year.
But at least the five-year, $500-billion deficit-reduction accord will give the federal government a balanced budget by the mid-1990s. Right?
Wrong. The package, analysts say, relies on optimistic and probably unrealistic economic assumptions that undermine its claim to produce an overall balanced budget by fiscal 1994 and a surplus in that part of the budget outside Social Security by 1996.
“A genuine dent was made in the amount the federal government will have to borrow,” says Allen Sinai, chief economist at the Boston Co., an economic forecasting unit of American Express, “but the deficit is still going to stay quite high for the next several years.”
Moreover, many analysts are skeptical of the lawmakers’ claim that the budget package will produce a sharply improved economic climate and allow the Federal Reserve to reduce interest rates significantly.
“The idea that this deficit-reduction package will have a favorable short-term effect is certainly dubious,” says Joseph White, a Brookings Institution analyst who recently co-authored a book entitled “The Deficit and the Public Interest.”
“And while it may modestly improve the economy over the longer run,” White adds, “the notion that it will lead to a great new era of economic growth is even more doubtful.”
Despite such skepticism, budget planners are counting on a renewed burst of noninflationary economic growth within the next year or so, predicting that the economy will expand at nearly a 4% annual rate from 1992 through 1995 while avoiding a recession either this year or in 1991.
They also are forecasting that long-term interest rates will fall substantially from a peak of about 8.7% this year to about 5.3% by 1995.
Most analysts scoff at those assumptions and some even contend that the final budget agreement could end up making the nation’s economic situation slightly worse rather than better.
“U.S. politics is shifting away from the growth orientation which characterized the 1980s to a new focus on income distribution,” argues David Hale, chief economist at Kemper Financial Services in Chicago.
“As a result, it is difficult to imagine the United States effectively using fiscal policy to bolster its dismal private savings rate,” Hale says--a situation that he predicts will leave the nation with “some mixture of high real interest rates, reduced consumer access to credit and weak asset markets.”
But while the budget deal is probably being oversold as a device for balancing the budget and dramatically improving the economy, it appears to be a major step forward in finally imposing real fiscal discipline on Congress.
“For the first time, we’re going to have meaningful expenditure controls in this country,” says Carol Cox, director of the Committee for a Responsible Federal Budget. “I don’t think most members of Congress actually realize what they have done to themselves. Legislative bodies hate spending discipline.”
Moreover, unlike most budget agreements of the past, the new five-year, $500-billion package contains few phony cuts and inflated deficit-reduction claims.
Under the new deficit accord, Congress is effectively abandoning the doomsday machinery of the Gramm-Rudman deficit-reduction law for a more realistic approach that sets annual caps on broad categories of government spending.
The Gramm-Rudman law established theoretical deficit targets far in advance that invariably were ignored in practice. By contrast, the new approach will require Congress to follow through on its vow to curb spending by predetermined amounts.
Under the new system, for at least the next three years, the federal government will not be able to spend above certain specific limits on the military, domestic programs, foreign aid and benefit programs without triggering automatic cutbacks in those categories.
In the final two years of the agreement, there is some flexibility to boost domestic spending slightly as long as the Pentagon budget is cut by an equal amount, or vice versa.
The only escape clause is for Congress to rewrite the law it is about to adopt, a move that would require presidential consent.
As a result, Democrats in effect are agreeing to put themselves in a straitjacket that will sharply restrict their ability to propose new spending programs for at least the next five years. And Republicans are agreeing not to offer any new tax cuts unless they are offset by higher taxes elsewhere.
In a departure from past practice, the spending limits and revenue projections will be based on up-to-date figures, changed each year to reflect technical changes and the actual performance of the economy.
“What they are saying is that ‘we will deliver roughly $500 billion in deficit reduction come hell or high water,’ ” White of Brookings says.
“But if the deficit turns out bigger than expected just because the economy fails to match today’s expectations, that alone won’t trigger a sequester,” White adds. “This should produce more truth-in-budgeting and eliminate most of the smoke-and-mirrors that Gramm-Rudman forced on Congress.”