Budget baloney: no slicing permitted.

Budget Baloney: No Slicing Permitted

THE FEDERAL BUDGET for 1989 is really the last from the Reagan Administration, and also the first budget that is not being dismissed out of hand, brushed off with a few cute cliches. There is more spending for fashionable social programs in it, and less for defense, a change which is getting predictably good press. It's just the minor non-defense cutbacks that aren't going over so well.

What is so sacred about the programs the OMB (Office of Management and Budget) wants to scrap? The Economic Development Administration just collects taxes from Town A to help Town B take business and jobs away from Town A. Small Business Administration loans presume that small is so beautiful that taxpayers should subsidize loans that may make someone rich, and taxpayers should also absorb the uncollected losses if the enterprise doesn't work out. When the OMB merely suggests unloading ("privatizing") some shaky federal loans, critics are quick to describe this as selling off precious national assets--as though federal repossession of vacant houses in Houston is a sure way to balance the books.

After the media's ritualistic dismissal of the slightest trimming of private raids on the public purse, the next step is always to accuse the OMB of writing a "rosy scenario" and praise the Congressional Budget Office for its "realism" about how lousy the economy will be. CBO "realism" right now has economic growth dropping from 3.8 per cent last year to 1.8 per cent this year, and inflation rising to nearly 5 per cent. Yet marginal tax rates came down to 28 per cent this January, and (not by coincidence) stocks, bonds, and the dollar all improved. Government forecasters are never more accurate than investors. Stock prices would not have risen if economic growth really looked as anemic as the CBO expects, and long-term interest rates would not have fallen if inflation were going to be as high as the CBO expects.

If the CBO estimates turn out to be too gloomy, that alone would bring the 1989 deficit closer to $130 billion than to their estimate of $176 billion. But this assumes they have the 1988 figure right, because each year affects the next. When 1987 tax receipts increased by $85 billion--much more than expected--the artistic explanations of why that mistake wouldn't happen again emphasized tax receipts from one-time capital gains in the 1986 stock market. But there were even larger sales of stock once again in 1987, and even at the brief depths of the October crash most stocks were higher than a year before. Unexpected capital-gains taxes should thus generate another big revenue windfall this April. There is also ample evidence that lower marginal tax rates reduce the allure of even legal tax avoidance, such as tax shelters, municipal bonds, company cars, stock options, and other forms of deferred compensation. At 28 per cent, many people will prefer to be paid in cash and to report that taxable income rather than engage in cumbersome bookkeeping to hide it. This will surely create another unexpected revenue windfall, but it is not likely to be noticed until April of 1989, because reduced avoidance and evasion mainly affects income not subject to withholding. Put it all together, and a 1989 budget deficit below $100 billion is certainly not out of the question. Unless, of course, new taxes and tariffs dump the economy over the cliff.