The compromise budget agreement reached this fall by the Bush Administration and Congress represents a genuine improvement in the deficit outlook and should allow our lawmakers to put aside the debate that has preoccupied them for so long. There is only so much time and energy available to expend on economic and social legislation, and it would now be more constructive to use that time and energy to examine our national priorities and seek efficient ways to address them in the budget process.
My assertion that the deficit is under adequate control needs some explaining in light of the fact that the deficit for this year is likely to total more than $300 billion. Indeed, many economists and politicians are already criticizing the budget agreement because of the high deficits scheduled in the near term and because they consider its economic assumptions, which lead to projected budget surpluses by 1995, to be overly optimistic.
The current deficit is acceptable because a significant part of it comes from transitory developments, including a weak economy that can use the fiscal lift the deficit provides. Besides the reduced revenue and higher transfer payments that come with recession, the deficit is bloated by temporary costs of the thrift industry bailout and by the incremental defense costs from the military buildup in the Middle East.
The official deficit projections for later years still need to be modified for their unduly favorable economic assumptions. I would also omit the surplus projected for the thrift industry bailout after 1993 when assets acquired in earlier years are expected to be sold. Not only is this highly uncertain, but such asset transactions do not have the same economic impact as other budget expenditures.
Omitting this bailout surplus, and assuming a slower rate of growth and higher interest rates than what is officially projected, I estimate a moderate deficit of between 1% and 1.5% of gross national product in the 1995 budget, with the economy at high employment. That may not be optimal fiscal policy. But it is only a slightly larger high-employment deficit than the average for the 1960s and 1970s, and a much smaller one than the average of the 1980s.
It is still fair to ask why anyone should believe even such modified projections for the longer run. After all, past deficit projections under Gramm-Rudman-Hollings have never been met or even approached, and that is only partly because they were based on unrealistic economic assumptions.
The main problem has been that the Gramm-Rudman-Hollings projections specified only a wish list of deficits, with no spending or tax programs to achieve them. The new agreement includes some tax increases and specifies spending ceilings by broad expenditure categories. Within broad categories, spending more on some program requires either spending less on another program in that category or adding new revenue.
Responsibility for enforcing the ceilings, including authority to sequester funds within each expenditure category, rests with the Administration. All these new provisions are the real strength of the new agreement and why it should not be taken as just another variation on the old Gramm-Rudman-Hollings program. Unless the Administration ignores the agreement's ceiling or, together with Congress, changes the legislation, there is meaningful deficit reduction ahead.
Granting all this, the real reason for avoiding further debate on the budget deficit is not that the agreement is optimal, but that it is good enough. Reopening the debate at this time would be counterproductive. For one thing, it would push other important matters off the political agenda.
Several items are on my own list of urgent business. We need to find ways to contain the cost of health care, which is adding sharply to price inflation and to federal budget outlays. We need to review the government's place in insuring and regulating financial institutions, not only the thrift and banking systems, but also semi-private lending programs such as the Federal National Mortgage Corp. (Fannie Mae). where the government's responsibilities are now only implicit. Also, reopening the deficit debate in the hope of trying to cut deficits further would run a serious risk of doing more harm than good if Democrats and Republicans started horse trading over tax changes. One does not have to believe in the supply-side tooth fairy to prefer a tax system with a broader base, lower rates and no loopholes to its opposite.
Perhaps a new debate would produce more revenue through base-broadening reforms. But it is more likely to produce traditional partisan divisions. For example, any attempt by Democrats to raise more income tax revenue from upper-income groups will renew Republicans' drive to cut the capital gains tax rate.
Whatever else one believes about capital gains, it is clear that a capital gains preference will open anew the tax shelter industry that was largely closed by the 1986 tax reform. If tax shelters again become important to private decisions, a lot of investment funds will go not where they are most productive but where they are most sheltered from taxes. Such misdirection of funds would undo many billions of dollars of deficit reduction in its effect on growth and productivity.