Special Report: Cutting the Deficit

By Richard Hornik and the Washington bureau

Unlike its predecessors, the thick document did not spark explosions of anger or snorts of derision as it landed on Capitol Hill last week. When Ronald Reagan submitted to Congress his eighth budget, a $1.09 trillion spending package for fiscal 1989, not even the Democrats pronounced it D.O.A., as they have in years past.

Why the sudden bipartisan harmony? Partly because exhaustion and even boredom have taken a toll in seven years of bitter ideological combat; mostly because the battle over this budget has already largely been fought. Reagan's document embodies the compromise deficit-reduction plan forged during the emergency White House-Congress budget summit held during those anxious days last fall after the stock market crashed. Noting that the document "does not fully reflect my priorities," the President said, "I am adhering to the bipartisan budget agreement and keeping my part of the bargain. I ask Congress to do the same." The lawmakers seemed ready to cooperate. "I think it's a good-faith budget," said Florida Democrat Lawton Chiles, who chairs the Senate Budget Committee. "It looks like it meets the summit agreements."

On the surface, the Reagan 1989 budget is an impressive effort. It sets a deficit target of $129.5 billion, less than the $146.7 billion gap expected for 1988 and far lower than the $176 billion shortfall projected for 1989 if Congress and the White House do not follow through on the agreement to raise revenues and cut spending. The amount of deficit reduction Reagan plans for 1989 is probably just right. Anything more might throw the economy into a recession.

As a long-term blueprint for U.S. financial stability, however, the Reagan budget is woefully inadequate. For one thing, the President intends to raise $10 billion in 1989 through the sale of federal assets like the Naval Petroleum Reserves and other one-shot gimmicks that will do nothing to reduce the deficit permanently. The President wants to boost outlays for education, law enforcement, science and AIDS research -- all worthy proposals -- but steadfastly refuses to support tax hikes to finance increased spending over the long run. Moreover, Reagan's budget projections are based on the decidedly optimistic assumption that the gross national product will grow an average 3.2% annually over the next five years. Even with that rosy projection, the Administration forecasts a deficit of $51.1 billion in 1992 and $23.3 billion in 1993. The President who campaigned on a promise that he would balance the budget by the end of his first term is now finishing his second term with that goal nowhere in sight.

Why has he failed? How difficult can it be to make the Government live within its means? Those questions prompted TIME's Washington bureau to undertake an ambitious project: drafting its own long-term proposal for balancing the budget, details of which can be found in the following pages. , Seven TIME correspondents, combing the tax code and federal programs from agriculture to welfare, searched for new revenues and spending cuts that would be feasible and fair. Among the many experts they consulted, several were especially helpful: Rudolph Penner, a senior fellow at the Urban Institute and former director of the Congressional Budget Office; Joshua Epstein, senior fellow in foreign policy studies at the Brookings Institution; Robert Greenstein, executive director of the Center on Budget Policy and Priorities; and his colleague Gordon Adams, director of the center's Defense Budget Project.

The object of the exercise was not to come up with the best theoretical plan for eliminating the deficit, taking no account of the political obstacles that almost invariably thwart Congress and the White House. Rather, the purpose was to demonstrate that achieving a balanced budget necessarily involves broad- based sacrifices that may be unpleasant but are hardly catastrophic.

The goal was to wipe out the deficit by 1992 -- a year ahead of the target in the latest version of the Gramm-Rudman law. The case for balancing the budget sooner rather than later is simple: the longer it takes, the more difficult it becomes, and the more costly the delay. During his terms, Reagan has amassed a higher deficit total ($1.25 trillion) than all previous Presidents combined. In the process, he and Congress have more than doubled the national debt, to $2.36 trillion. Meanwhile, interest on the debt has snowballed, threatening to bury the financial fortunes of generations to come. If the trend is not slowed, the annual net interest tab will surpass $200 billion in 1992, more than the U.S. deficit. Put another way, the budget would move into surplus were it not for interest on past deficits.

If the economy continues to expand, revenues will grow faster than spending, but not fast enough to close the deficit in the foreseeable future. Using figures from the Congressional Budget Office and assuming that GNP growth will average 2.5% over the next few years (a more realistic figure than Reagan's 3.2%), TIME estimates that if Congress takes no further action to cut spending or raise revenues, the deficit will still be $128 billion in 1992. That gap cannot be eliminated all at once, and the cuts should not be made mechanically or without regard to economic conditions. If a recession hits, the deficit is bound to balloon and the budget-balancing process will have to be pushed back until after the economy recovers. |

TIME's correspondents quickly concluded that any attempt to close the deficit strictly through spending cuts would be unworkable and unwise. Most non-defense programs have already been slashed relentlessly during the Reagan years, and the President has reluctantly consented to slow the growth of his military budget.

And the deficit cannot be eliminated by reforming the budget process and by rooting out waste, fraud, abuse and pork, as Reagan seemed to claim in his State of the Union address. While the President can rail against "blueberry research, the study of crawfish and the commercialization of wildflowers," shutting down every wasteful program in Government would raise a few billion at most. The truth is that almost all federal spending -- whether necessary or not -- goes for worthwhile and popular purposes. Another pipe dream is the suggestion by Democratic Presidential Candidate Michael Dukakis that a federal tax amnesty and stricter enforcement would bring forth at least $35 billion worth of delinquent taxes.

The inescapable fact is that the deficit must be closed through a combination of spending cuts and substantial tax increases. Though Reagan grudgingly accepted a $14 billion tax hike for 1989 as part of the summit agreement, he is opposed to increases for subsequent years. TIME's proposal calls for eliminating the projected 1992 deficit of $128 billion through $49 billion in spending reductions and $79 billion in revenue increases. Though the President's original tax cuts were simply too deep to be sustainable, there is no reason to reverse those cuts completely or undo the 1986 income- tax reform, which brought down marginal rates while closing loopholes. Many economists agree that high tax rates encourage tax evasion and investments in unproductive shelters. Thus TIME is not suggesting a general increase in tax rates. One inequitable quirk in the tax code could be removed, however. At present, individual taxable incomes (with one exemption) between $43,150 and $100,480 and joint incomes (with two exemptions) between $71,900 and $171,090 are taxed at a 33% marginal rate. Higher incomes are taxed at a 28% marginal rate. TIME suggests that the top bracket be a uniform 33%.

The bulk of the revenues needed to curb the deficit could be raised through higher excise taxes, further loophole closings and selected increases in corporate levies. A sharp rise in the gasoline tax would not only raise revenues but promote energy conservation. Taxes on cigarettes, beer and wine - could also be increased. Popular tax preferences could be limited so that they do not provide windfalls for the wealthy.

On the spending side, TIME's proposals are not radically different from Reagan's. Like the President, our correspondents have concluded that major savings could be achieved by reducing agricultural subsidies and getting a better handle on medical costs. Both the White House and TIME propose large cuts in defense.

The crucial question is what to do about Social Security, the biggest non- defense spending program. Reagan leaves it untouched -- a politically safe but economically questionable position. TIME suggests a practical approach. Instead of trying to reduce Social Security benefits now, Congress could increase the income taxes on those benefits (see following chart). The burden would fall most heavily on the wealthiest recipients.

Even if TIME's proposals were carried out, the Government's finances would not be put on a permanently firm footing. For years, Uncle Sam has been borrowing money from the Social Security trust fund to pay for other programs. That remains the case in Reagan's 1989 budget and in TIME's as well. Eventually, when the baby boomers start to retire, that money will have to be paid back. Taxes will have to be raised further or spending -- almost certainly Social Security benefits -- will have to be reduced. In short, the job of balancing the budget is not going to get any easier in the future. The time to start attacking the problem vigorously is now.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

CAPTION: REMODELING THE BUDGET

DESCRIPTION: Federal revenue, spending and budget deficit, 1981-1987; budget projections for 1989-1992 under current plan, Reagan's plan, TIME's plan.