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Forecasting Follies

August 10, 1986

The White House is forecasting 4.2% growth in the economy during fiscal 1987, the budget year that begins Oct. 1. The Congressional Budget Office is betting on 3.5%. That does not seem to be much of a disparity. But the entire Gramm-Rudman Deficit Reduction Act of 1985 could slip through that needle's eye, making the difference between muddling along with a 1987 deficit of $165 billion or so, and triggering Gramm-Rudman's indiscriminate, automatic spending cuts.

But, of course, both the White House and the Congressional Budget Office could be off. After all, they are attempting to forecast what the economy will do as much as a year in advance during highly volatile economic times when the stock market might swing 50 points one way or the other from one day to the next. Some private economists are saying that growth might be no more than 3% during fiscal 1987. Almost everyone's economic forecast for fiscal 1986 was overly optimistic, and thus the deficit has grown well beyond expectations--to a record $225 billion by CBO count and to $230 billion by White House estimate.

The entire forecasting exercise demonstrates the folly of the federal establishment's trying to budget by fiat for years in advance. Rather than going through contortions of meeting the demands of Gramm-Rudman, which include a $144-billion deficit ceiling in 1987, Congress and the White House should come up with a realistic compromise. It would provide a significant reduction in the deficit, a reasonable budget for both domestic programs and defense and a modest tax increase to help pay for it all. That is what budgeting is all about.

The goal of Gramm-Rudman was to reduce the deficit in $30-billion annual chunks, arriving at zero at the end of five years. The passage of Gramm-Rudman at least demonstrated some resolve to do something about the deficit. But there was nothing magic about the annual deficit-reduction targets, or even about the five-year goal. This has been demonstrated by the performance of the economy in the second half of this year and the resulting ballooning of the deficit. Congress and the President have been at an impasse all year long over how to reach the $144-billion deficit for 1987 and thus avoid the doomsday cuts that otherwise would be imposed by the law.

But now, getting down to $144 billion becomes all the more improbable, if not impossible. It would require a cut of more than $60 billion, compared with the original $30 billion--all in savings, since the President has refused to consider any tax increase.

But, lo, there may be a way through the eye of the needle: Use the most optimistic economic forecasts, adopt a budget that appears to meet Gramm-Rudman and then go home to face re-election on the theme of having slain the deficit monster once again. Congress would be free of the Gramm-Rudmam yoke as soon as it slipped past the trigger date in early October. Some of the major 1987 appropriation bills may not even be passed by then. Thus the official books would read that spending for many agencies in 1987 would not exceed 1986 levels, although ultimately the figures will be considerably higher.

There you have it: blue smoke, mirrors and voodoo economics all over again. The only practical political solution may be for Congress to come back in a lame-duck session in November, when members no longer are worried about the election, and clean up the mess left by Gramm-Rudman. How? By fashioning a budget that meets national needs and makes a sizable reduction in the deficit. If more revenue is needed to make all the pieces fit, then adopt a modest tax increase to fill the gap.

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