Still Stuck in a Vicious Circle

By GEORGE J. CHURCH

The budget predicts less red ink but high unemployment

In a State of the Union speech a President can describe his program in appealing generalities, but in the budget he must translate vague words into hard numbers. Ronald Reagan's budget for fiscal 1984 suffers more than a little in that translation. It features a spending freeze that really is not a freeze, and a plan to reduce deficits that would still leave them distressingly high. Moreover, it bases all calculations on a set of predictions about unemployment, output and interest rates so gloomy as to make clear that if the economy is "on the mend," as Reagan proclaims, the mending will be excruciatingly slow.

For those very reasons, however, the budget is far more realistic than the first two that Reagan submitted, which combined heady estimates of expenditure savings with overly optimistic economic forecasts to produce deficit predictions that wandered into dreamland. The highlights of the new document:

SPENDING. Estimated at $848 billion in fiscal 1984, which starts Oct. 1, up slightly more than 5% from the $805 billion now expected for the current fiscal year. The increase would be only a bit above the anticipated rate of inflation, thus allowing Reagan to claim that he has in effect "frozen" expenditures in real terms and cut them $32 billion below what would be paid out if all Government programs continued unchanged. But the so-called freeze would be extremely uneven. After adjustment for inflation, military outlays would jump 9%. Civilian spending in real terms would drop 3%, but only if the Administration is correct in calculating that even a creeping economic recovery will reduce payments for unemployment compensation and farm-price supports by $15 billion. That drop is not included in the $32 billion of expenditure savings because it is supposed to be automatic, but it is the biggest deficit-reducing item in the whole budget.

REVENUES. Calculated to total $660 billion during fiscal 1984, up more than 10% from the current financial year and $10 billion more than would be collected under present tax rates. The extra $10 billion would be provided primarily by increases in Social Security payroll taxes that have been recommended by a bipartisan reform commission and a new plan to make workers pay income taxes on a portion of the medical insurance premiums that employers pay for them.

THE DEFICIT. Will soar to $208 billion in fiscal 1983, nearly double last year's record, $110.7 billion. For fiscal 1984 the deficit would drop to between $188 billion and $189 billion; by Reagan's figuring, that would be $42 billion less than if Congress enacted no changes in spending and tax programs. But in fiscal 1985 the deficit would rise by $5 billion, to $194 billion, largely because tax collections, held down by the final stages of Reagan's 1981 cuts, will not rise fast enough to match increases in spending.

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.

In general, the Administration proposes that fiscal 1984 expenditures on "nondefense discretionary programs" be set at $115 billion, vs. $116 billion in the current fiscal year. Spending on these programs varies year to year according to congressional appropriations; in contrast, roughly $350 billion of the budget, including outlays for Social Security, food stamps and welfare, is determined by benefit formulas that are fixed by law and can be changed only by rewriting the statutes. Reagan's plan would force real cutbacks in many discretionary programs, because the budget estimates that the inflation rate will rise to 4.9% this year, a percentage point above the 1982 increase, and will settle at about 4.5% thereafter.

Compared with the size of the deficits, the immediate savings from some of these moves would be small: $3 billion in fiscal 1984 from skipping a pay raise for federal civilian employees; $5 billion to $6 billion from delaying COLAs in Social Security and other entitlement programs. But Reagan and his aides calculate that savings would compound dramatically in future years, because of the slowdown in increases. The five-year savings from the pay and COLA hold-downs are estimated at no less than $77 billion.

The freeze, nonetheless, would have an unequal impact. Military spending under Reagan's proposals would be $8 billion less than originally planned in fiscal 1984, but still $30 billion greater than in the current financial year. Funding would also be substantially raised for some civilian programs. Among them: aid to law-enforcement and antidrug programs, and to highway and airport construction.

To compensate for these rises, Reagan would make extra-deep cuts in other programs. Postal subsidies would be whacked to half of the $800 million of fiscal 1983 (probably necessitating sharp increases in postal rates), energy research would be cut to about half of this year's $4 billion, and operating subsidies for mass transit, including Amtrak, would go down substantially.

On the whole, recommended cuts in social spending will be less drastic than those the Administration proposed in its first two years. In fact, one section of the budget lists programs on which Reagan has given up trying to persuade Congress to enact deep reductions. One is the WIC (women, infants and children) nutrition program that Congress has twice refused to slash as deeply as the President wanted; he is now recommending that it be continued at fiscal 1983 funding levels. Says one Administration budgeteer: "We ran into two stone walls, so now we are throwing in the towel and admitting it."

Even so, Reagan is courting controversy by proposing major overhauls in two of the fastest-growing parts of the budget: civil service pensions, which are separate from Social Security, and health care. Expenditures for civil service pensions have rocketed from $2.8 billion in 1970 to $21.1 billion a year at present. Among other reforms, Reagan would require that new federal employees join the Social Security system, raise employee contributions for those already in the federal pension program from 7% to 11% of salary, and change the formulas for computing benefits. Estimated savings: $1.4 billion in fiscal 1984, $16.2 billion over five years.

Of far more concern to most Americans are the recommended revisions in Medicare, for the elderly, and Medicaid, for the poor. The Government currently foots hospital bills for these patients from the second through the 59th day of an illness. Reagan proposes making patients pay part of that cost, an average of 8%, or $28 a day, through the 15th day and 5%, or $17.50, thereafter. The Administration also proposes standardizing Government reimbursements to doctors and hospitals for each case, rather than allowing them to bill Uncle Sam for whatever fees they think proper, as is done now. These ideas are explosive: doctors, hospitals and old people make up an exceptionally potent combination of lobbies.

The Administration's immediate tax proposals are relatively minor. Apart from a speedup in Social Security tax boosts, the most important is a recommendation that employees pay income tax on medical insurance premiums paid by their employers in excess of $2,100 a year, or $175 a month. The revenue that would be raised would be $2.5 billion in fiscal 1984. The real aim of this idea, in combination with Reagan's suggested changes in Medicare-Medicaid benefit formulas, is to curb medical inflation by persuading doctors, hospitals and patients to watch costs be cause the Government and employers can no longer be relied on to pay nearly the entire bill.

Far more significantly, the budget recommends stand-by tax increases of $5 per bbl. on crude oil, both domestic and imported, and a surcharge of perhaps 5% on individual and corporate income taxes; the additional levies would raise $40 billion to $50 billion a year.

Chances are that the budget Congress finally enacts will bear only a passing resemblance to the one that Reagan is now proposing. The Administration's plans are best seen as an opening bid in a poker game. Unlike last year, when the Administration bluffed for months with a weak hand, Reagan has cards good enough to keep him in the game during the budget bargaining ahead. The outcome depends on whether the final product will reduce deficits enough to remove a major obstacle to American prosperity. -- By George J. Church. Reported by Laurence I. Barrett and David Beckwith/Washington

*This rate might be called civilian unemployment, since it does not count as part of the labor force the 2.1 million members of the armed services. The Government this week will begin issuing a second set of figures that counts men and women in uniform as being employed; it will show a jobless rate one-or two-tenths of a percentage point lower than the civilian rate.

With reporting by Laurence I. Barrett and David Beckwith/Washington This file is automatically generated by a robot program, so viewer discretion is required.