The Disappearing Dollars

Before we get to President Reagan’s 1986 budget, which will come out Monday, there is still this unfinished business of whom or what to blame for the current budget deficits. This is more than just an academic exercise. The budget process is a political process. Whoever has the political upper hand going into this year’s budget fight has something of an advantage.

If the President is able to persuade the electorate that his tax cuts and defense spending are not causing the deficits, or even contributing much to them, then he stands a better chance of emerging with those programs unscathed at the end of the year.

In an interview last Saturday, Reagan heaped the deficit blame back onto Congress, saying that the President can’t spend a nickel. The President’s budget, however, is supposed to be the guiding document for allocating the nation’s resources each year. Further, this is the President who threatened time and again to veto any “budget-busting” appropriations bill that Congress sent down from the Hill. In fact, he has not.

The President’s constant refrains are that:

--The deficit is a structural one, caused by half a century of overspending by Congress, largely on social programs.

--His tax cuts and defense spending did not and do not cause the deficits. The deficits would not have grown the way they did but for the unexpected recession, which forced up spending (unemployment benefits, welfare, etc.) and forced down revenues as income fell.

Much of the record shows the contrary, as set out in a detailed report by the House Budget Committee entitled “A Review of President Reagan’s Budget Recommendations, 1981-85.”

Using figures from the bipartisan Congressional Budget Office, the report shows that three years of tax cuts reduced revenues for the current budget year by $117 billion while defense spending is $36 billion higher than the figure projected in 1981, based on an annual real growth of 3% in the defense budget. It should be noted as well that Congress has not totally shunned all of Reagan’s domestic spending reductions. They amount to $59 billion this year.

Certainly the recession contributed to the deficit. The Congressional Budget Office estimated that $113 billion of the 1983 deficit was caused by the economic downturn. Another $83 billion was laid to structural deficit causes, chiefly tax cuts and defense spending.

As the economy has improved, the portion of the deficit caused by the economic cycle has declined, down to an estimated $32 billion this year. But the structural deficit soars, rising to more than $170 billion this year and a projected $238 billion by 1988. The report says that the structural deficit is growing not because of social programs but because of “large and increasing tax reductions, rapid growth in military spending and escalating interest payments.” And these estimates are based on optimistic economic forecasts.

The report says that the rising structural deficits would not be so bad if supply-side economics had significantly increased U.S. productive capacity, adding, “To date, however, few of the hoped-for supply-side effects have occurred.”

The report undercuts the President’s theme that the deficit could be tamed if only the domestic side of the budget could be brought under control. Still, his new budget may well call for about $5 in domestic cuts for every dollar trimmed from the Pentagon budget. “We’ve squeezed that (defense) apple pretty good,” Reagan said, even though Secretary of Defense Casper W. Weinberger wants only $8.7 billion cut from a projected $286-billion budget.

The deficit picture worsens with every new report, but Reagan and Weinberger hang tough on defense. Worse yet, the Pentagon hints that advocates of more defense cuts may be a little less than patriotic. Reagan claimed last Saturday that the defense budget “is dictated by people outside the United States.” Whatever that may say about the caliber of Pentagon planning, the deficit is clearly dictated by people inside the United States. Knowing where deficits actually come from is an essential first step toward dictating much smaller ones.