The Numbers Hiding in the Federal Budget

The key to understanding the massive $1.45-trillion federal budget--and what it means for the U. S. economy--is in the numbers you don’t see.

The budget deficit, for example, is even larger than the $280 billion acknowledged by the Bush Administration on Monday as it submitted its fiscal 1992 spending plan to Congress. That deficit calculation for the fiscal year beginning Oct. 1 includes roughly $75 billion borrowed from the Social Security trust fund’s reserve for future retirees. If the government hadn’t borrowed the reserves for current expenditures, the actual deficit would be about $355 billion.

Another number you don’t see is the assumption made about the economy’s future growth. After predicting less than 1% inflation-adjusted growth for the rest of fiscal 1991, the Office of Management and Budget assumes growth of 3.6% in fiscal ’92 and more than 3% growth annually through the mid-1990s. That assumption is important because OMB uses it to estimate future government revenue, and thus the shape of budgets and deficits through 1996--when the government predicts a federal budget surplus.

Trouble is, the estimates are hard to believe. Economic growth of 3% is difficult for the U.S. economy at this point, say most economists, who think that 2.5% growth per year in the ‘90s is about all the economy can sustain. And a half-percentage point difference in growth for the vast economy is substantial--the equivalent of adding 1.04 million jobs a year paying $25,000 each.

Allen Sinai, chief economist of Boston Co., says the economy would need a burst of productivity gains to achieve the growth OMB is predicting.

Also, the budget submitted Monday doesn’t include any cost estimate for the Gulf War--on grounds that accurate calculations are difficult at present. But for a rough estimate, U.S. allies are kicking in $51 billion, so the United States will pay that much and probably more.

The unwritten message is very clear--financing the government will be a burden on the economy in the years ahead.

You can understand this better if you think in terms of your own household spending: Say you’re going to live beyond your income for a while on the assumption that you’ll get a sizable pay raise every year through 1996. At the same time, you’re taking money out of a retirement fund to use for current expenses. And you’ve just had accidental damage to the car or house that will cost you beyond what insurance will pay.

You’d be pretty close to the edge--and if the raises you counted on didn’t come through, you could be pushed to personal bankruptcy, to the point where lenders wouldn’t allow you to borrow any more.

Now consider the U.S. government, which will be borrowing “a ton of money,” says economist John Rutledge of Claremont Economics Institute--roughly $350 billion this year and next and maybe the year after, too. The pressure on capital markets will be substantial, and likely to push up interest rates.

That’s an eventuality that bullish investors may not be counting on, but it’s the logical outlook. Buyers of Treasury bonds will demand higher interest rates if they fear inflation. Foreign investors, fearing depreciation of the dollar, will demand higher interest rates or want to buy U.S. assets--land, buildings, companies. This disturbs Americans politically.

Yet, cutting the federal budget is easier said than done. In the new budget, OMB Director Richard G. Darman charts the flow of benefits to middle class and wealthy Americans and suggests cutting. Accordingly, the new budget attempts to cut Medicare for taxpayers earning more than $125,000. In future budgets, the earnings limit can be lowered to cut benefits for a large swath of the middle class.

But Darman’s charts are otherwise misleading. Social Security, which is funded directly through the payroll tax, makes up the bulk of benefits shown. If Social Security benefits were to be cut, the tax would have to be cut as well.

It’s also easy to say defense can be cut. But in the 1990s, perhaps 15 to 20 small countries will acquire nuclear weapons and missiles capable of delivering them. In an unsafe world, defense budgets won’t be cut that much.

What will be done? “I think there will be a new tax bracket added,” says economist Barry Bosworth of Brookings Institution. It won’t be discussed this year, or maybe even next year--when there is a presidential election. But watch for talk of a new bracket to raise taxes on upper-middle income Americans--those earning, say, more than $60,000.

Higher interest rates and taxes. Is the economic future unrelievedly grim? Not necessarily, says economist Sinai, if we actually do the things the budget is talking about--repairing roads and bridges, improving education, funding research and development. That would provide a boost to productivity, a needed increase to the economic pie so all could share.

Here again, the key lies in what you can’t yet see: Whether the new budget’s numbers contain political substance or political lip service.