WHEN THE new Congress arrives in Washington in January, it will face a major piece of unfinished business: the huge and growing U.S. budget deficit.
That may come as a surprise to millions of Americans who followed the interminable budget debates on Capitol Hill this fall. In fact, the public was misled.
The country was told again and again that the five-year, $492-billion deficit-reduction plan cobbled together by the Bush White House and the 101st Congress involved real hardship -- the "biggest tax increase in American history" and "harsh" cuts in government spending. The implication was that the deficit dragon would be slain once and for all.
Government leaders buried the bad news in statistical tables and voluminous fact sheets: The current fiscal year's deficit, even after the deficit-reduction package agreed to in October, will be "higher than any this country has ever experienced," according to Robert D. Reischauer, director of the Congressional Budget Office.
Assuming a booming economic recovery, the 1992 deficit will still be $315 billion. With the new plan in place, the national debt, which currently stands at more than $3 trillion, will grow by at least another three quarters of a trillion dollars by mid-decade, even taking into account rising receipts from Social Security taxes.
If Congress views what was done as only a first step, then there is no cause for concern. The package will subtract roughly $492 billion from the combined deficits of the next five years, whatever that number will be. The worry is that not enough was done and that Congress is under little pressure to do more.
Lost in the partisan rhetoric between the White House and Congress was the fact that the plan as it now stands does not require a response to bigger deficit numbers. Most government spending programs would keep right on growing.
Now that the election is over, fiscal reality is dawning.
Only hours after the polls closed, Sen. Sam Nunn (D-Ga.) warned in a nationally televised interview that "the American people are going to have another round of disillusionment when they find that we've only dealt with a small portion of a very, very large continuing deficit, and when they discover that these economic assumptions we've been operating on . . . are highly optimistic." The first clear sign of the inadequacy of the deficit reduction plan will come when the White House submits its fiscal 1992 budget to Congress in February. It will contain an updated estimate of the 1992 revenue gap. This fall's deficit-reduction plan envisioned a gap between revenue and spending for fiscal 1992 of $315 billion, $35 billion more than the shortfall in fiscal 1990 (which ended on Sept. 30). But the government's prognosis for 1992 was based on assumptions about the economy that were made in September. They do not include the possibility of a long recession, or factor in the call-up to active duty of National Guard and Army Reserve units for Operation Desert Shield, or make provision for new disasters, such as a massive failure of the banking system requiring a refunding of the Federal Deposit Insurance Corp., or a new round of overruns in the savings and loan bailout.
On the contrary, the $315 billion deficit figure assumes the most robust American economy since the mid-1980s. To hit that target, the gross national product would have to grow by 3.8 percent in calendar year 1992, short-term interest rates would have to fall to 5.7 percent, and oil prices ($29.78 a barrel on Friday) would have to average $21.10. By the end of 1992, short-term interest rates are assumed to have dipped below 5 percent, a level not seen since 1977.
If last month's Congress-White House deal didn't kill the deficit dragon, what was it all about?
A closer look suggests that it was about avoiding really harsh pain -- the pain of massive spending cuts mandated by the tough old Gramm-Rudman-Hollings system. This was essentially what forced President Bush to abandon his "no new taxes" vow.
Had the old system operated, spending cuts of $84 billion would have been required in the 1991 fiscal year, which began Oct. 1. The final deal between the White House and Congress produced a quarter of that spending reduction and, even with tax increases, only half that much overall deficit reduction for 1991.
Gramm-Rudman spending cuts, for example, would have pared $2.6 billion from NASA's "baseline" budget (last year's budget plus an upward adjustment for inflation and technical factors); $1.4 billion from the Federal Aviation Administration; $769 million from highway building; $325 million from the National Science Foundation; $359 from the Federal Bureau of Prisons; $86 million from education funds for the handicapped; and $453 million from energy assistance payments to low-income families.
Neither Congress nor the White House wanted to face the electorate after that kind of spending carnage. And they didn't. True, they did rein in farm subsidies, cut defense spending and slow the growth of Medicare costs. But most government programs and departments emerged unscathed. Social Security and Medicaid were not touched. Medicare costs will still increase by more than 50 percent by the mid-1990s. Spending to run government departments and pay for most non-defense programs, such as Headstart, environmental protection and the space program, received double-digit increases for 1991, and there was enough money to start paying the U.S. dues arrearages to the United Nations and begin funding a big new AIDS-care initiative. As long as Congress and the White House stick to the deal they struck, they are under no immediate pressure to handle bigger deficits. The deal is that Congress can't legislate any new programs or tax reductions unless the effect on the deficit is offset somewhere else.
Beyond that, the deal basically scrapped at least until 1993 the disciplinary machinery of Gramm-Rudman-Hollings, for whatever its is worth. In fiscal 1991, 1992 and 1993, if the deficit exceeds the targets because, for example, program costs are underestimated, tax revenues are overestimated or the economic assumptions turn out to be way off the mark, there is no requirement for Congress or the White House to take remedial action. The president would have the option to do so in January 1993, but wouldn't have to.
Instead, the deficit targets would be adjusted, not government spending or taxes. If inflation soars, for example, the pot of money available to the appropriations committees would be increased by a "technical adjustment," because the costs of government were being driven up.
When the new president submits the fiscal 1994 budget in January 1993, he has the option of trying to hit the deficit target for that year. In that case, he could employ across-the-board spending cuts. But he can also discard the targets for the next two years. And the worse things get in the economy, the more tempting that may be.
Defenders of the agreement say that the allowances for government spending were made with an eye on a possible recession and the need for some economic pump-priming. But their argument would be stronger if the projected deficit improvements were not based on assumptions about growth, interest rates and inflation that are highly unlikely even without a recession.
Others argue that the recessionary escape hatch only shows how little other room the government has left in which to maneuver. But if Congress felt seriously constrained by the deficit, it wasn't evident in the waning days of the 101st Congress. It authorized costly new health and welfare programs, channeled billions of dollars in pork-barrel projects to home states and districts and approved a 12-percent increase in domestic spending, excluding Social Security, well above the inflation rate.
Meanwhile the rhetoric emanating from both parties left a contrary impression: that Americans were being asked to make tremendous sacrifices. Republicans portrayed tax increases as harsh and sweeping. Democrats warned of the horrendous impact on the elderly of hikes in Medicare premiums.
In fact, the tax increases are minimal when spread out across the whole economy. A family that earns $36,000 will end up with $290 less in 1991, a reduction of 8/10th of a percent of its income. Even the top one percent, whose average after-tax income is $428,000, would end up with only $9,241 less in after tax income, a decrease of 2.2 per cent.
As for the super-rich, people earning above $1 million a year, they will feel the least pain of all. First, the budget deal caps taxes on capital gains at 28 percent. Second, the maximum tax they will end up paying will be about 32 percent, just one percent above other taxpayers far below their income level. That slight rise comes about because once they cross the $100,000 level, their itemized deductions are reduced slightly and above $275,000 they lose all personal exemptions.
Nor is the extra 5-cents-a-gallon tax on motor fuels large compared with the 20-cents-a gallon increase that hit consumers after Iraq's invasion of Kuwait. After a brief flurry there have been few complaints about the billions of dollars that the price runup is bringing to Saudi Arabia, oil companies and speculators. Yet politicians took months to agree on a gas-tax rise that will reduce the deficit by only $4.4 billion this year. It is going to take extraordinary political leadership to prepare an electorate that for 10 years has been lulled by two presidents and Congress into thinking that taxes need not be raised while government spends more for "my" programs while cutting everybody else's. Some have read this month's election results as a sign that the public won't accept additional belt-tightening. Certainly, many politicians say that. Many fear that if they do the right thing on the deficit they will be easy targets for interest groups and 30-second "attack" commercials.
The president and the congressional leadership should lay partisanship aside and educate the electorate to the dangers for future generations posed by today's unresolved deficit. But there isn't much evidence that either the chief executive or the Hill leaders are interested in shouldering this responsibility. Until they are, it is unfair to blame the public for the deficit woes.
Dan Morgan and Walter Pincus cover national issues for The Washington Post.