To President Reagan's list of record-breaking numbers this week--the biggest federal budget with planned spending of $757.6 billion in fiscal year 1983 and the biggest projected deficit at $91.5 billion--must be added the way in which money will be raised to finance the huge outlays.
In large part, the needed extra funds to run government will be raised by selling government securities to the investing public.
Indeed, federal borrowing in the credit markets also will rise to record levels in the next 12 months--raising questions about how much money will be left for nongovernment borrowers and at what cost. Such questions are particularly crucial for such credit-sensitive industries as housing and automobiles, now both depressed because of a long bout of high interest rates that have discouraged buyers.
What the federal government borrows from investors, or in some cases from agencies such as the Federal Reserve System, is the difference between its revenues and spending. In fiscal 1981, ended last Sept. 30, total federal borrowing expanded by $89.6 billion (not counting money raised to re-fund securities that were maturing).
As a result, overall federal debt passed $1 trillion for the first time on the last day of the fiscal year, for a grand total of $1,003.9 billion.
In the current fiscal year, new federal borrowing is projected in Reagan's budget to soar to $130.2 billion, followed by another $124.2 billion of new federal financing in fiscal year 1983. The previous record was $122.3 billion for fiscal 1980.
According to Arnold Moskowitz, first vice president and economist at the investment firm of Dean Witter Reynolds Inc., federal government needs will lead to a capital markets "slugfest" between the Treasury and private sector, "causing peak interest rates" by midyear: a prime rate in excess of 18 percent in the second quarter and slightly less in the third quarter.
The peaks in federal government borrowing are projected to be in the same months (April through September), when Treasury debt will rise to a seasonally adjusted annual rate of more than $160 billion, also a record, according to a budget analysis by Data Resources Inc., a Massachusetts forecasting company.
"This budget is a big negative for the financial markets," Allen Sinai of DRI said yesterday. "It shows no signs of compromise, only escalates the potential for a clash between fiscal policy and the Federal Reserve. . . . It abandons the goal of a balanced budget, which is astonishing for a Republican administration and appears to sanction inflationary pressures later in the decade."
Moreover, the projected deficits--as big as they are--are "too low because the underlying assumptions on the economy, unemployment and interest rates are too optimistic," Sinai added.
As the federal government increases its needs to borrow money, a "crowding out" process takes place in the view of many economists. With a limit to how much money can be raised in the credit markets, money flows first to the least-risky U.S. government offerings. Businesses and consumers are crowded out of the markets because interest rates are higher on the funds remaining to be loaned.
"The huge projected federal sector credit needs continue to be the bottleneck in the system," says Moskowitz. He projects that federal financing as a share of overall money raised in credit markets will soar to 33 percent this year compared with 27 percent in 1981 and 18 percent as recently as 1979. Federal borrowing from the public was just $3 billion in 1974 but has fluctuated wildly since the mid-1970s.
In the view of Dean Witter economists, a low point in private credit demand will take place in the current quarter to be followed by slow economic growth and more business debt needs. But "the clash between large Treasury financing and the basic credit needs of an expanding economy--for autos, housing and inventories--will meet head on, causing peak interest rates," Moskowitz advised his clients.
Either deficits will have to be curtailed or monetary policy eased, Moskowitz and other said. But the former is politically unattractive in an election year and easier money policy by the Fed will raise inflationary expectations significantly.