In the teeth of his own economic advisers' forcast of a recession this year, President Carter's new budget offers, not a tax cut, but a $40 billion increase in the real tax burden borne by individuals and business.
"I believe current economic conditions argue for restraint," Carter declared in his budget message, and his budget would achieve that mostly on the tax side of the ledger.
Federal taxes would be allowed to rise to 21.7 percent of the gross national product, the highest level since 1944. With spending tightly contained, as well, this would be from an economic standpoint the most restrictive budget since the Vietnam war tax surcharge was imposed in 1968.
Because no tax cuts are proposed, individuals will have to pay federal income taxes next year averaging 11.8 percent of their personal income, the highest proportion in any year since World War II. They will be paying about $14 billion mor in 1981 than in 1980 just because of the way inflation pushes them into higher tax brackets.
Separately, workers and business will together be paying about $11 billion more in Social Security taxes next year because of tax rate and wage increases already approved by Congress.
In addition, the new crude oil tax about to be approved by a House-Senate conference committee likely will produce a net of $13 billion to $14 billion in 1981. While consumers won't pay the tax directly, they wil be nicked by the higher gasoline and heating oil prices that will enable oil producers to pay the tax.
Carter also proposed several small tax changes that will bring in another $2 billion or so, as well as a speedup in some individual and corporate income tax collections that will increase revenues $4.5 billion in 1981. Speeding up collections is not the same as raising taxes, but having to pay up more quickly has its costs, even so.
Whether Carter sought the various tax increases or just accepted those generated by inflation or previous tax legislation, he relied on them to provide a fiscal policy to further restrain an inflation-prone economy that already is on the verge of recession.
Carter's new economic forecast calls for a mild recession lasting most of this year, followed by a moderate recovery in 1981. The gross national product, which grew 0.8 percent last year, is expected to fall 0.6 percent in 1980, but grow again by 2.8 percent in 1981, administration economists said.
Unemployment, now 5.9 percent, is forecast to rise to 7.5 percent in the fourth quarter of this year and drop only to 7.3 percent late in 1981.
In years past, such a forecast would have been enought to cause almost any president to propose an immediate tax cut or stepped-up spending. And Carter did promise in the budget message: "If the economy begins to deteriorate significantly, I will consider tax reductions and temporary spending programs for job creation targeted toward particular sectors of economic stress."
Administration economists cautioned, however, that even if a tax cut is promised later this year, it probably would not be large enough to offset fully the combined effects of inflation on the personal income tax and the scheduled Social Security tax increases.
The problem is, with inflation so high, the risks of an easier fiscal policy are high, too. Consumer prices rose 9 percent during 1978 and accelerated to a 13.3 percent rate last year.
The administration forecasts a 10.4 percent rise this year, followed by 8.6 percent in 1981. Any action that might boost those already high numbers would be far more costly than being a bit late in battling a recession, Charles Schultze, chairman of the Council of Economic Advisers, told reporters.
"Although virtually all economic forecasters in the private sector join us in predicting a mild recession," Schultz said, "current economic statistics so far fail to show any overall decline in the economy. There has been some weakness in housing, and in autos, but ... the economy in recent months has shown much more resistance to recession than earlier forecasts had foreseen . . .
"Under these circumstances, and with inflation countinuing at double-digit levels, proposed tax cuts or other stimulative measures now would have signaled that the administration was prepared to abandon its anti-inflation fiscal policies, not merely at the first sign of economic weakness, but before the first sign even appeared."
And acting too soon, he continued, "would have increased inflation expectations, weakened the value of the dollar in exchange markets [and] risked translation of last year's oil inflation into a new and higher wage-price spiral."
A tax cut or targeted spending increases could be proposed if economic prospects "significantly deteriorate," Schultze went on."But let me repeat, the current economic situation in no way warrants such measures, and it would be extremely hazardous to undertake them."
Just how austere and restrained the new budget is can be seen by looking at what would be happening to the budget deficit this year and next if there were no recession.
When unemployment rises, as it is forecast to do this year, federal revenues drop and spending goes up.Revenues fall because people out of work pay fewer taxes, and their employers, whose profits probably are lower, do, too.
Meanwhile, many of those becoming unemployed begin drawing unemployment benefits, and spending for some other federally supported programs, such as welfare, usually goes up as well.
For each 0.1 percentage point rise in the unemployment rate, federal outlays will increase by about $200 million, budget officials estimate. Meanwhile, for each 0.1 percentage point, revenues would decline by approximately $2 billion.
During fiscal 1979, which ended last Sept. 30, the deficit was $27.7 billion, while the unemployment rate averaged 5.8 percent. According to the economic forecast, unemployment will average just about one full percentage point higher this fiscal year. Such a drop in the economic normally would add roughly $20 billion to the deficit.
In fact, the new estimate for the fiscal 1980 deficit is $39.8 billion. Since the increase from last year is only about half of what one would have expected, given the rise in unemployment, current fiscal policy is actually tighter than it was even though the deficit is bigger.
It would get tighter still in 1981, as Carter has proposed it.
The administration's forecast calls for an average unemployment rate of about 7.4 percent in fiscal 1981, up 0.6 percentage points from the 1980 average. In the face of this, the 1981 budget deficit drops from $39.8 billion to $15.8 billion.
One way many economists look at the impact of the budget on the econoy is to consider what revenues and receipts would be at full employment. Since estimates of what rate of unempolyment constitutes full empolyment vary greatly, economists usually focus on the change -- as opposed to the level -- in the full-employment, or "high-employment" budget surplus, as it is now known.
In this way, one can estimate whether a budget is becoming more restrictive or more stimulative to the economy without being confused by changes in the budget deficit caused by, for example, a recession. In the case of the 1981 budget, the result is dramatic.
From fiscal 1979 to 1980, the high-employment budget moved $16 billion in the direction of restraining the economy, the administration estimates. That was equal to about 0.5 percent of GNP. Many economists consider a change in fiscal policy significant when it equals 1 percent of GNP.
But from 1980 to 1981, as a consequence of Carter's proposing no tax cuts and allowing no growth in total spending after adjustment for inflaton, the high-employment budget moves very sharply in the direction of restraint -- to the tune of $53 billion. That is equal to almost 2 percent of GNP.
The only recent change in fiscal policy of comparable magnitude occurred in 1975, and it went in the other direction. That year, with GNP only about half as large as it is expected tobe in 1981, a $23 billion tax cut was passed to help boost the economy out of the worst recession since the 1930s.
What event might cause the administration to ease up on the fiscal policy brakes? When will Carter really begin to look at tax reduction and other anti-recessionary measures?
"There are no mechanical sets of numbers that you can use as a trigger," Schultze said. "For example, unemployment might be rising very rapidly, accompanied by other signs that the rise is very brief and would turn around . . . in which case, with a large rise in unemployment, you wouldn't do anything. . .
"Conversely, you might have a situation in which a much slower rise in unemployment was accompanied by a lot of other signs that things were deteriorating very much." he said. In that case, the administration would act.
In the meantime, the budget deeply underscores the administration's conviction that, as Treasury Secretary G. William Miller put it: "The most pressing economic problem we face is inflation."