If Congress does not enact new spending cuts or tax increases, the federal deficit will jump to $157 billion in fiscal 1983 and climb steadily to $248 billion by 1987, the nonpartisan Congressional Budget Office said yesterday.
By 1984 the deficit would be equal to 5 percent of the nation's total gross national product--the highest level since World War II--and would stay that high throughout the forecast period, according to the new CBO projections. In 1981 the deficit equalled 2 percent of GNP.
The CBO report comes just before President Reagan is due to send his 1983 budget to Congress. It is likely to deepen the already severe concern in Congress about the size of the budget deficit and the prospects for the economy. As the CBO points out, the gloomy deficit projections mark a break with the past when forecasts of the budget always showed revenues rising faster than federal spending, as inflation pushed people into higher tax brackets.
The latest projections show federal spending rising from $740 billion this year to $809 billion in 1983, to $889 billion in 1984 and to $1.1 trillion in 1987. But if Congress goes along with President Reagan's goal of increasing defense spending by 7 percent a year in real terms, this would add $7 billion in 1984 and $70 billion in 1987 to the baseline projections, the CBO said.
The combination of Reagan's planned defense buildup and the big multi-year tax cuts enacted last summer means that "large budget deficits will continue indefinitely" unless Congress cuts spending or raises taxes, the congressional budget experts say.
Moreover, they warn that "the very large and rising deficits projected in this report could seriously impair the overall performance of the economy." There is "no clear economic rationale" for the "persistence of deficit spending year after year," the CBO says in one of the three reports it published yesterday.
Together with the Federal Reserve's tight money policy, the deficits could lead to severe strain in financial markets and persistent high interest rates that could "crowd out private investment." The congressional analysts point out several times that the Fed's policy is now a serious constraint on how fast the economy can grow.
Although the CBO predicts that the present recession will end some time in the first half of this year, it projects a fairly sluggish recovery that is "less vigorous than the typical cyclical upswing" because of tight money targets. Real GNP is expected to be 0.1 percent lower on average this year than last after accounting for inflation, with 2.8 percent real growth during the year as the economy picks up.
The economy then will grow by 4.4 percent in 1983 and by 3.6 percent in 1984, the CBO forecasts. It assumes steady real growth at about 3 1/2 percent in the outyears of the forecast, although it cautions that such a growth path may not be attainable "with the prospective trend of money growth and without the enactment of further spending cuts or tax increases to reduce the deficit."
Unemployment is expected to average 8.9 percent this year and 8 percent next year. The outlook for inflation is more cheerful. On the broadest measure of prices--the GNP deflator--inflation is projected to fall from 8.6 percent during 1981 to 7.2 percent during this year and to 6.9 percent by the end of 1983.
Interest rates, which have a major budgetary impact because of their effect on the cost of servicing the government's debt, are expected to average 12 percent on three-month Treasury bills this year and 13.2 percent in 1983. However, this week the rate on three-month Treasury bills climbed to 13.85 percent.
As Reagan's tax cuts for business and individuals build up, the share of GNP going in federal taxes will fall steadily from 21.1 percent in fiscal 1981 to 19 percent in 1983 and 17.7 percent in 1987, the CBO says. However, the buildup in defense means that, despite last year's cuts in domestic spending, federal spending will be a higher proportion of GNP in 1984 than in 1981 unless Congress makes further cuts.
In the coming fiscal year, outlays are projected at 23.6 percent of GNP, falling to 23 1/2 percent by 1984 and 22.7 percent in 1987.
The CBO this year has produced a lengthy analysis of how Congress could reduce the budget deficit. It stresses that spending--especially on defense--is hard to cut in the short term so that, if the outyear deficits are to be reduced, Congress must take action fairly soon.