Budget Would Be Casualty of Gulf War : Finances: Gov. Pete Wilson and his advisers are optimistic about the state’s economy, inflation and the Mideast crisis.

How deeply Californians have to dig into their pockets for more taxes may depend on whether the United States goes to war in the Persian Gulf.

Gov. Pete Wilson already plans to tap Californians’ pocketbooks for $1.8 billion in new taxes to help finance his $55.7-billion budget.

But his spending plan may have wobbly legs because it is based on an optimistic view of the California economy over the next 18 months and an assessment that “the Persian Gulf situation will be resolved by spring without military action.”

If the assumptions are wrong, the state’s $7-billion projected shortfall could grow significantly and the result is likely to be even higher taxes.

“We do not know what the dimensions of the recession will be so we cannot do more than make a projection at this time,” Wilson said Thursday as he unveiled his budget.

Such crystal-ball gazing is the basis of all state spending.

Before the governor and his budget aides decide how much the state can afford for health, education, prisons and other programs, they have to figure out how much revenue they can count on.

Therein lies one of the trickiest, arcane and riskiest tasks for fiscal officials: predicting how the economy will perform over an 18-month period.

Wilson and his budget advisers are betting that there will be no war, that oil prices will stabilize at $23 to $25 a barrel by late 1991 and that mortgage interest rates will drop to 9% by summer. The result was a prediction that the recession will be “mild” and of “average” duration.

Not only do they expect the recession to end by the second half of this year, but Wilson and his aides assume healthy growth will take hold in 1992 and corporate profits, for example, will rise 16.9%.

If the assessment is wrong and war starts, then Wilson and his staff believe that the recession will worsen and correspondingly drive down tax collections. Budget officials believe that oil prices would skyrocket, that consumers would encounter inflation and curtail purchases, and that financial markets would tumble, driven by fear in place of confidence.

Wilson’s budget was built on the assumption that the state will take in $45.8 billion in general purpose tax revenues during the 1991-92 fiscal year. Even with the optimistic forecast, Wilson figured that the state would be $7 billion short of what it needs to get through the new fiscal year. Thus the need for $1.8 billion in tax increases and deep cuts in education, welfare and other programs.

By defining the problem the way he has, Wilson was able to put together a budget that avoids a major increase in sales, income or general corporate taxes. Had he and his aides been gloomier in their outlook, there would have been a greater need for a larger tax increase.

If Wilson is wrong, chances are good that programs will be disrupted and services will face further cuts--or that big tax increases may be required anyway.

Everyone, including Wilson, acknowledges that the budget assumptions may miss the mark. The state budget document itself cautions that “changes in the economy could add or subtract up to $2 billion in revenues.” The forecasts are admittedly preliminary with a final set of revenue estimates expected to be released in late spring.

“It is very difficult to predict revenue over six months, let alone 18 months,” said Finance Director Thomas W. Hayes. “We’re doing the best we can at this time. We will be closely monitoring the revenue over the next three or four months.”

Senate President Pro Tem David A. Roberti (D-Los Angeles) already is questioning Wilson’s budget assumptions, suggesting that some sort of bigger tax increase should be readied. Similarly, in 1983, then-Gov. George Deukmejian agreed to impose a sales tax increase if the economy did not improve. The increase never took effect.

“I’m not as optimistic as the governor is over the potential status of (an improving) economy over the next fiscal year,” Roberti said. “We have to be prepared for (further) fiscal downturn. . . . If there is a downturn, we are going to have to trigger some kind of revenues in the second year of the budget. That is only prudent.”

Generally, Wilson’s budget forecast falls in the middle range of projections issued by agencies that track the economy.

Wilson’s budget analysts foresee a lower gross national product in 1991 than that forecast by First Interstate Bank, the Commission on State Finance and the Bank of America. But the analysts figure that the economy will perform better than forecasters working for UCLA, Wells Fargo Bank and Data Resources.

For 1992, the Department of Finance adopted assumptions slightly less optimistic than those issued by UCLA, predicting that California personal income will grow by 7.6%, compared to 7.7% estimated by UCLA, 7.5% by First Interstate Bank, and 7.1% by the Commission on State Finance.

The track record of financial forecasting during the Deukmejian years was not good. One year tax revenues were $1 billion higher than the governor had counted on, the next year the bottom dropped out and they were $1.5 billion short.

The agency responsible for the faulty forecasts was the Department of Finance, which drafts the governor’s budget and is the last word on state finances. But the nonpartisan Commission on State Finance and legislative analyst’s office generally were in agreement with the forecasts, so they too must share the blame.

In their defense, budget analysts say a $1-billion fluctuation ought to be judged against the size of the $55.7-billion budget.

Nonetheless, Deukmejian’s last term was a chaotic, roller coaster budget ride that fueled partisan warfare in the Capitol, led to passage of Proposition 98, which set up constitutional funding guarantees for public schools, and left the impression that no one was in control.

The sorry record of revenue forecasting during the late 1980s was in part responsible for last summer’s record budget stalemate. Traditionally, the governor and Department of Finance release their final set of revenue estimates the first week in May.

But as the record of miscalculations mounted, budget analysts begged more and more time, pushing their final revenue forecasts into late May, then early June. Last summer, they didn’t do one at all.