Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, July 16, 1990 TAG: 9007160251
SECTION: NATIONAL/INTERNATIONAL PAGE: A/1 EDITION: EVENING
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Long
The increase could force automatic spending cuts of more than $100 billion if Congress and the administration don't agree on a package of spending reductions and tax increases.
Today's estimate did not even include the costs of bailing out the savings and loan industry. When those costs are included, the deficit for the fiscal year that begins Oct. 1 climbs to $231.4 billion, the White House said in its official midsession review of the budget.
The administration's new forecast is far higher than the $100.5 billion deficit estimate included in the president's budget when it was released last January.
It also is significantly higher than the $64 billion deficit target set by the Gramm-Rudman balanced budget law.
If Congress is unable to reduce the deficit to within $10 billion of the $64 billion, it triggers across-the-board spending cuts.
Along with its new deficit estimate, the administration included dire warnings of what could happen if the current budget negotiations between Congress and the administration fail and the cuts are triggered.
White House Budget Director Richard Darman called the cuts of more than $100 billion unprecedented in their magnitude and "highly disruptive" to a host of government programs.
Darman said such a reduction would require a 38.4 percent in non-defense spending and cuts of between 25.1 percent and 43.3 percent in military programs. Social Security and some other entitlement programs are exempt from Gramm-Rudman cuts, forcing even sharper reductions in other programs.
Darman said that the Gramm-Rudman cuts would force major cutbacks in air traffic control operations, increasing delays for air passengers by 400 percent to 600 percent. The cuts also would require a 40 percent cut in the Head Start program affecting 200,000 4-year-olds and sharply curtailing other government programs ranging from poultry and meat inspections to cleanup of Superfund toxic waste sites.
"If the summit negotiation fails these effects are exactly what we will face in the fall," Darman told a crowded news conference.
The administration's new estimates make it highly likely that the Gramm-Rudman law will have to be at least modified, given the size of the savings needs to reach a $64 billion target. Both the administration and Congress have been discussing spending cuts and tax increases in a range of between $50 billion and $60 billion, about half of what would be needed with the new estimates.
By emphasizing a deficit figure that did not include the savings and loan bailout, the administration seemed to be laying the groundwork for removing this giant expenditure from the Gramm-Rudman calculations, something that many members of Congress have also proposed.
The administration blamed the sharp deterioration in the deficit from January until now on the higher-than-expected S&L bailout and weaker economic growth, which cuts into government revenues, and higher interest rates, which raise the cost to the government of paying for the $3 trillion national debt.
The administration actually included three deficit estimates in its midterm review. In addition to the $231.4 billion with the S&L bailout included and the $168.8 billion excluding S&Ls, the administration cited an even lower $148.4 billion deficit that excluded food stamp costs because the program technically expires this year.
The midsession budget review lowered projected economic growth from 2.6 percent down to 2.2 percent, more in line with what private forecasters are predicting.
It projected a 4.8 percent rise in consumer prices this year, matching last year's inflation increase, but up from the administration's estimate of a lower inflation figure of 4.4 percent.
It raised the government's cost of borrowing short-term by a full percentage point to 7.7 percent.
"The January budget had assumed that interest rates would start to decline steadily this year. Instead, rates rose through early spring," the report noted. "The midsession review assumes interest rates will remain around current levels during the second half of this year and then move progressively lower during the following five years as inflation and the federal deficit are reduced."
Both Treasury Secretary Nicholas Brady and Michael Boskin, chairman of the president's Council of Economic Advisers, said that the administration's interest rate forecast depended on the Federal Reserve easing up on its tight-credit stance.
While such administration entreaties have failed in the past, the Fed did take a small step last week to a looser monetary policy, following growing signs of a weakening economy.
When President Bush sent Congress his 1991 budget on Jan. 29, he predicted a deficit of $100.5 billion - absent any changes in government policy - for the fiscal year that starts Oct. 1.
To reduce that figure to the $64 billion required by the Gramm-Rudman law, Bush called for $36 billion in spending cuts and modest tax increases, far lower than the more than $100 billion in cuts now being estimated.
The administration must make its official estimate of Gramm-Rudman cuts on Aug. 25 and then the cuts become final when the fiscal year begins in October.
Bush has said the change in estimates was a major factor influencing his decision last month to reverse his stand against tax increases.
While economists were widely skeptical of the January economic assumptions used by the administration, the July update was likely to bring more agreement.
Roger Brinner, senior economist at DRI-McGraw Hill, an economic forecasting firm, said he believes the 1991 budget deficit will top $188 billion. He said that assumes the current budget negotiators will be able to arrive at a tax and spending package that will reduce the deficit by $38 billion.
Michael Evans, head of a private forecasting firm, was even more pessimistic, predicting that the 1991 deficit will hit $230 billion. He said the deficit in the current fiscal year was expected to total $205 billion, compared with an actual deficit of $152 billion in the last fiscal year.
by CNB