$100 Billion Guessing Game

Washington these days is playing a confusing guessing game that might be called What's Our Deficit? or perhaps Can You Top This? Ever since President Ford submitted his budget in February, estimates of the likely red-ink figure for fiscal 1976, which begins July 1, have been escalating at something like a billion-dollar-a-day pace. The President initially proposed a $51.9 billion deficit; six weeks later the Administration upped the figure to $55.5 billion. Earlier this month, Treasury Secretary William Simon warned that the deficit could hit $80 billion.

Shock Effect. Last week the House Budget Committee estimated $72 billion, but the Office of Management and Budget calculated that if Congress passes every proposal now before it, the figure would grow to $100 billion or more. If that report was meant to shock Congress, it had the desired effect. The next day Maine Democrat Edmund Muskie, chairman of the Senate Budget Committee, warned his fellow Senators that "Congress is going to have to exercise great restraint to avoid overshooting the mark as we try to get our economy moving again."

He is right. The budget is a primary weapon for doping with recession, and the size of the deficit may well determine whether the budget fails or succeeds in its mission. A deficit no larger than the $47 billion now expected for fiscal 1975 would show that the Government was not pumping sufficient funds into the economy quickly enough to stimulate a swift and thorough recovery. By contrast, a deficit that really did swell to $100 billion or more in fiscal 1976 could ignite a new outbreak of inflation that could end any recovery.

Actually, no one at this stage can accurately estimate how large the deficit is likely to be next year, though the House Budget Committee figure of $72 billion probably is as good as any. About the only certainty is that federal revenues in fiscal 1976 will be sharply reduced by the $24.8 billion gross tax cut signed by President Ford last week (see THE NATION). But it is impossible to predict to what extent that cut might be offset by an economic resurgence, which would lift the individual incomes and corporate profits that are subject to taxation. A much greater imponderable is the spending proclivity of Congress.

Both the House and Senate seem determined to show voters that Congress can crusade against the recession more effectively than the Administration. Observes TIME Economic Correspondent John Berry: "Every committee is behaving as if it thinks that its program is the only one that stands between the American public and total economic disaster." The result has been the introduction of scores of bills, ranging from increased Social Security benefits to Direst

massive public works Potions -j programs, which if enacted will add billions to the deficit. For his part, Muskie has been discussing possible cuts in the President's proposed budget with Administration officials, including Defense Secretary James Schlesinger. Even so, the Senate now has before it a number of its own proposals. Samples: grants of $4 billion to financially squeezed cities and states; a $3 billion increase in unemployment compensation; and $1.9 billion worth of added incentives to the housing industry.

Target Figures. Fortunately, Congress is beginning to legislate spending programs in a more thoughtful fashion than in the past, when new proposals were simply tacked willy-nilly onto the budget and no one bothered to add up the totals. In accord with the 1974 budget reform act, by April 15 budget committees in both houses will recommend target figures for total spending, and indicate in which areas spending should be cut back. Congress can still go ahead and vote higher expenditures than the committees suggest, but it would do so in the full knowledge of the budget-busting potential.

For the past two weeks the House Budget Committee has been trimming away. The committee cut the Administration's proposed defense outlays by $4.5 billion to $89.5 billion and reduced the White House's $6.3 billion foreign aid proposal to $4.9 billion. Closer to home, the committee slashed the $5 billion public works program proposed by a House committee to $3 billion and lowered a House-backed increase in highway spending by $1.5 billion to $6.9 billion. It voted a ceiling of 7% on welfare and Social Security benefit increases, though many Congressmen favored no limit at all. However, there is so much support among other Representatives for added spending that some of the committees' cuts may be restored and the deficit thus fattened.

How huge a deficit can the nation stand? No more than $60 billion, Ford said last week -- "This is as far as we dare go." But the consensus among economists is that a $75 billion to $80 billion deficit could be handled without undue strain. "I am not complacent about the deficit, but I am not losing any sleep over it either," says Economist Walter Heller. Like others, Heller feels that corporate and personal borrowing have fallen to such low levels that the Treasury will be able to finance the deficit by borrowing funds that would otherwise be left idle by the recession. Economists are also counting on the Federal Reserve to expand the nation's money supply at an annual rate of at least 8%.

Future Test. But a rise in the deficit toward the $100 billion mark would endanger both the nation's recovery and the fight to keep price increases down. In order to raise the necessary funds, the Government would be forced either to compete with corporations in an increasingly tight capital market or expand the money supply drastically, or, more likely, do both. A scramble for borrowed funds would leave corporations without enough money for needed modernization and expansion because the Government can always outbid them for investors' favor. Equally bad, excessive increases in the money supply would lead to a renewal of inflation. "If through massive overkill we end up with inflation and reduced production, that is downright masochistic," says Beryl Sprinkel, a senior vice president of Chicago's Harris Trust & Savings Bank.

Even if the budget remains within the $75 billion to $80 billion range, the course of recovery still faces future perils. The real test will not come until next spring when the upturn should be well advanced and corporations and individuals will presumably be looking for many more loans to increase business activity and buy consumer goods. If the deficit does not start shrinking then, a delayed but damaging competition for borrowed money could break out.

Whether that fruitless confrontation can be avoided depends heavily on the types of programs Congress builds into the budget. The danger is that the House and Senate will insist on voting permanent programs such as the farm-support bill, rather than short-term stimulation measures that can be revoked when recovery makes them unnecessary. In that event, the public and private sectors of the U.S. will be placed on a collision course that would reverse the upturn and perhaps leave the nation worse off than it was before the recovery began.

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