Congress probably will not make big cuts in defense or domestic spending next year and faces annual budget deficits of as much as $200 billion unless the Federal Reserve revives the economy by forcing down interest rates, Senate Majority Leader Howard H. Baker Jr. (R-Tenn.) said yesterday.
Baker urged a "higher level of cooperation and coordination" among the White House, Congress and the Federal Reserve to bring down interest rates and said he does not "at this time" support legislation to force a change in Fed policy.
But "all bets would be off" if interest rates, which have been declining, start to go back up, Baker said on "Face the Nation" (CBS, WDVM). "I think it would be unconscionable for interest rates to start back up," he added.
Sen. Henry M. Jackson (D-Wash.), interviewed on "Meet the Press," (NBC, WRC) said the Fed should be forced, if necessary, to take action that would lower interest rates.
"If we don't do that, we're going to slide into a deeper recession," Jackson said. "If the Fed won't move, they the administration ought to tighten up on the Fed." He did not specify how this might be done.
Baker's assertion that significant deficit reductions can come only from economic recovery, prompted by lower interest rates, amounted to the strongest signal thus far that Congress is shifting course and drawing the line on the kind of big budget cuts approved over the last two years under prodding from President Reagan.
"We're never going to save our way out of the recession," said Baker, adding that he sees no prospect of significant savings from defense, domestic appropriations or benefit entitlement programs, at least for the near future.
"So we're going to be locked into really unacceptably high deficits for the time being unless we can increase the level of economic activity of the country, and that is dependent to a remarkable extent on the level of interest costs . . . ," he added.
Asked how high those deficits might be, he said that "unacceptable to me means as high as last year, $130 billion, but it may be $150 billion, maybe even $200 billion."
Moreover, he said, it's "going to take three or four or five years" to control spending and revive the economy, meaning as many as five years of high deficits.
Baker said he thinks major tax increases are "unlikely," but then noted that there are only two ways to get revenue, by taxing and borrowing, and said, "We've borrowed about all we can borrow."
While ruling out action this year on anything more than the limited highway-jobs program that he and House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.) have endorsed for action in Congress' lame-duck session starting today, Baker left the door open to additional job-creating efforts next year.
If there is an additional jobs program, it's "not going to be a make-work system," he said, "but it may be something slightly beyond the highway program," which would create an estimated 320,000 road and bridge repair jobs, financed by a 5-cent-a-gallon increase in the gasoline tax.
The highway program is "really a drop in the bucket compared to what we need to do" in reviving the economy to create new jobs, he added.
Baker, who a year ago on the same program described Reagan's economic plan as a "riverboat gamble," was asked if he feels the same way now. "It's still a gamble," he said, "but I think it's going to work."