The White House and Congress have spent most of their energy this year on the problem of holding down spending, but now the budget is in danger of springing another leak--on the revenue side.
Some analysts now believe that lower than projected revenues could add as much as $30 billion to this year's deficit, and $40 billion or more to the deficit projected for 1984. Revenue deficiencies of this size would dwarf the spending cuts now being bitterly fought over in Congress. They could also make congressmen wonder whether it is worthwhile to search for more painful budget savings when these can be swallowed up so easily by a few weeks' loss in revenues.
Reagan officials were purposely optimistic in projecting revenues earlier this year to persuade Congress to go along with the president's large tax cut, sources have said. But some senior officials are now arguing for more realistic, and therefore lower, revenue projections to be included in the next official forecast to be published in January. If President Reagan is intent on keeping to his deficit targets of $43 billion for 1982 and balance by 1984, he must then soon start worrying about the revenue drain such a changed forecast would show.
There are several reasons for this drain, with rather different implications for policy.
First and most signifcant, the administration has projected growth rates for the economy that most outsiders, and many insiders, doubt can be achieved. Lower growth spells lower incomes, smaller profits, and therefore less to tax and less revenue for the government. The Internal Revenue Service loses about $5 billion for each 1 percent loss in growth, tax experts calculate.
Reagan has forecast 5 percent real growth during 1982 and 13 percent total growth, including inflation. But the Federal Reserve Board's tight money policy will just not leave enough room for that much expansion, outside economists believe. Alan Greenspan, former chairman of the Council of Economic Advisers under President Ford, predicts that the economy will only grow by 11.6 percent overall, and that Treasury tax receipts will total $634 billion for fiscal 1982 rather than the $663 billion projected by Reagan before he proposed raising an extra $3 billion in revenues this year.
A second reason revenues may undershoot is that some of the new provisions included in this summer's tax bill could cost much more than the Treasury has estimated. Outsiders believe that cost overruns for three--the so-called all-savers certificate, new eligibility rules for individual retirement accounts and the new leasing rule which allows companies to buy and sell tax credits--could run to several billions of dollars.
Ironically, the unexpected improvement in the oil market and the lower prices now expected will also cost Reagan revenues. The oil profits tax is highly sensitive to the price of petroleum, so with lower prices there will be less tax collected.
What should the administration do, if anything, to make up the lost revenues which now seem likely?
Many economists argue that policymakers should not try to make up for revenue that is lost just because the economy is sluggish. Opinions probably differ over whether revenues lost because windfall profits are down should be recovered elsewhere. However, there is no reason to treat overruns on a tax program any differently from similar cost overruns on spending. So far the administration has not made its position clear on either kind of revenue undershoot.
Treasury Secretary Donald T. Regan told The Washington Post in an interview that if there were significant revenue losses because of a weaker economy next year, then the administration may have to look for ways of offsetting the effect on the deficit.
However, Office of Management and Budget Director David A. Stockman has recently told reporters and senators that "cyclical" shortfalls in revenue, and the resultant rises in the federal deficit, not be counteracted by further spending cuts or revenue increases. He has the backing of many economists.
If the government tries to raise taxes to offset a shortfall in revenues caused by a recession it will only slow the economy further, the argument goes, and thus set off another round of lower income, profits and taxes. Moreover, if the economy is depressed, private sector demands for credit will be less. The bulge in the federal deficit as a result of the lower tax revenues will therefore be more easily financed without strain on financial markets.
However, the deficits now looming--on any realistic forecast of spending and revenues--are so large that they may well be considered structural and in need of action rather than cyclical and likely to pass when the economy picks up.
Senior officials who admit privately that the budget deficits between now and 1984 could be much higher than the White House forecasts publicly also hint that tax increases to help shrink the budget gap will be both necessary and acceptable to the administration. When the White House speaks of the need for more "savings," this could mean on either revenues or spending, or both, they say.
The president and Secretary Regan have both ruled out any turnabout on the central part of the summer tax bill: multiyear tax rate cuts for individuals and more generous depreciation allowances for business. If they remain steadfast, then extra revenues will have to be garnered from closing "loopholes" and raising other taxes, such as excise duties. Few believe that this will be easy.
Reversing some of the goodies put into the bill at the last minute could also help save a few billion dollars, and if targeted tax cuts overrun their original cost estimates there is a good case for trimming them back just as the administration proposes to do with budget programs.
The specter of huge budget deficits--perhaps as high as $60 billion to $80 billion--for each of the next three years will scare Congress into voting for still more spending cuts along with whatever revenue raisers may be necessary, some administration officials hope. If not, then Reagan could end up wishing he had never won his spectacular legislative victory on the tax bill last summer.
Treasury officials have said that the new all-savers certificates will cost $500 million in fiscal 1982, $2.8 billion in 1983 and $1.4 billion in 1984 for a total revenue loss of $5.3 billion. But outsiders, such as Oscar Pollock of Ingalls & Snyder, believe that with all the publicity surrounding the new certificates more people may buy the bonds, pushing the revenue losses significantly higher.
Pollock also argues that more people will invest in individual retirement accounts than Treasury estimates. This would push up revenue losses from the official numbers of $200 million in 1982 rising to $3 billion a year by 1986.