February 10, 1991
"The Deficit: Better Than It Sounds"
San Jose Mercury News
By Timothy Taylor
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BACK IN 1986, the federal budget deficit was at $221 billion, then its highest level ever. The American political system gathered its courage in both hands and responded with the Gramm-Rudman-Hollings act, which promised a balanced budget by 1991.

Now it's 1991, and the deficit for the fiscal year that started last October is slated to come in at $318 billion, a deficit record eclipsing the dubious accomplishment of 1986.

Even by the spaghetti-loose standards of budgetary forecasting, this would seem to be a bit of a miscalculation. Makes you feel like not such a clod for overdrawing your checkbook, doesn't it?

Yet in all the 2,000-plus pages of President Bush's proposed fiscal year 1992 budget, released earlier this week, there are no grand proposals to reduce the budget deficit. Reducing the deficit receives a quick two pages of discussion in the "Introduction," but deficit reduction doesn't appear in the 400-page section of the budget on "Themes and Priorities."

Even without such a plan, though, the FY 1992 budget predicts that the deficit will wither away by 1996.

The strange truth is that 1991 deficit is probably better than it sounds, which wouldn't be hard, because it sounds so terrible. This year's budget contains and emphasizes a lot of bad news.

But there are at least three major factors which should cause the deficit to decline sharply in the next two or three years: a recovering economy, the end of the S&L bailout, and the growing Social Security surplus.

Any budget is necessarily based on economic forecasts, which determine how much tax revenue is expected, how high public assistance payments will be, how high interest payments on the national debt will be, and so on. In the past, the estimates behind the budget have often been so optimistic as to strain credulity. But the forecast for 1991 GNP growth in this budget -- a real decline of 0.3 percent -- is even more pessimistic than the predictions of the non-partisan Congressional Budget Office.

But after showing a becoming pessimism toward economic prospects for 1991, and thus increasing the projected 1991 deficit, the budget's economic forecasts swing toward optimism. Although the deficit will shrink naturally as the economy recovers, the budget predicts that GNP will grow 3 percent faster than inflation every year from 1992 through 1996. Few private economists believe the bounce back will be that strong.

How much could economic recovery help the deficit? A rough estimate would be $87 billion: That's how much government tax revenues are being reduced in 1991 by the current recession, according to Richard Darman, director of the Office of Management and Budget.

This year's budget also swallows the costs for the rescue of savings-and-loan depositors all at once. In the budget, government outlays for deposit insurance look like this: $10 billion in 1988; $21 billion in 1989; $58 billion in 1990(!); $112 billion in 1991(!!); $88 billion in 1992(!); and $44 billion in 1993.

Those costs are for taking over the failed savings and loans and making sure depositors don't lose their money. But the government can recoup some of its money by selling off the assets of the S&Ls. Starting in 1994, the budget predicts that such sales will bring in about $35 billion a year.

Clearly, this budgetary accounting piles the costs of S&L disaster into a few years, primarily into 1991 and 1992. Over the next few years, the evolution of the S&L bailout should lead to a reduction of nearly $150 billion in the budget deficit -- the change from paying $112 billion to receiving $35 billion.

Social Security should provide another built-in reduction for the budget deficit.

Social Security used to be a program where the taxes collected from workers were immediately used to support existing retirees. But starting in the late 1980s, Social Security began to build up surpluses to pay for the retirement of the baby-boom generation in the early 21st century. By law, the surpluses are loaned to the rest of the federal government.

The Social Security surplus is predicted to increase from $57 billion in 1991 to $115 billion in 1996. That increase means the government will be able to borrow $58 billion less from private investors. Although taxpayers will need to pay the loans back to the Social Security fund in the next century, with interest, the growing surplus reduces the current deficit.

It would be foolish to expect the deficit to reach zero by 1996, as the new budget predicts. Long-term budget forecasts probably are worth the paper they're printed on -- after all, individual sheets of paper don't cost much -- but they aren't worth much more.

However, between an eventual economic recovery, the evolution of the S&L cleanup, and the growing Social Security surplus, it is not at all fanciful to expect the deficit to fall sharply in 1993 or 1994.

If the deficit does decline sharply from 1991 levels, as it should, it will be worth remembering that the politicians had very little to do with it. They will only deserve credit if they push down the deficit beyond these built-in reductions.

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