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Economic recovery and the compounded effect of tax increases and spending cuts would whittle the deficit to $148 billion in fiscal 1986, $142 billion in 1987 and $117 billion in 1988. These projections assume that Congress will enact standby increases in oil and income taxes that would go into effect on Oct. 1, 1985, under three conditions: that the legislators first pass all of Reagan's spending reductions; that the deficit still seems likely to exceed 2.5% of gross national product, or $100 billion a year; and that the economy is not in a recession.
ECONOMIC PREDICTIONS. The real shocker. The Administration is now forecasting two full years of double-digit unemployment: 10.9% this calendar year, a trifle higher than the 41-year peak of 10.8% recorded in December, and an even 10% in 1984. By the fourth quarter of that year, when the nation will be choosing its President, the rate would still be 9.6%.* It would not get down to 6.6% until 1988. The reason, Reagan's economists predict, is that the national output of goods and services will rise only 1.4% this year and 4% in later years, too slowly to put many people back to work quickly.
These forecasts are close to the bottom of the range of predictions being made by non-Government economists. Some Congressmen think Reagan and his aides are intentionally being excessively pessimistic, so that they can claim later (around election eve 1984, say) that their policies have produced a faster recovery than even they foresaw. Treasury Secretary Donald Regan denies that. Says he: "We are not deliberately offering a low-ball forecast."
In any case, the budget illustrates the vicious circle in which Government economic policy has been trapped. The surest way to reduce towering deficits would be to promote a faster recovery from recession than Reagan now foresees, but the deficits pose a daunting barrier to any vigorous rebound. For example, a further drop in interest rates is indispensable to a strong recovery. But the budget foresees the key 90-day rate on Treasury bills averaging 7.9% in 1984, about what it is now, because Government borrowing to cover the deficit will soak up too much money to permit any significant drop soon.
Reagan's main goal in framing the budget was to begin breaking out of this vicious circle by offering Congress and the nation some credible hope that he can at least start reducing deficits. Not all the details of how he plans to do this were available even at the end of last week; so many budget decisions were made so late that the Government expected to finish printing the document only hours before" it was to be submitted to Congress at noon Monday. But these are the outlines:
Reagan's weapon for holding down spending is the misnamed freeze. It has three main parts: 1) a one-year delay in pay raises for military and civilian employees of the Federal Government and in pension increases for their retired predecessors; 2) a six-month hold on cost of living adjustments (COLAS) in Social Security benefits; in Supplemental Security Income for the needy blind, elderly and disabled; in railroad retirement and veterans' pensions and in food stamps and child-nutrition programs; 3) a recommendation that Congress hold spending for many other programs close to 1983 dollar totals.