The economic recovery could be expected to reduce the federal budget deficit from $207 billion this fiscal year to $146 billion by fiscal 1986 if Congress adheres to its declared intentions to raise taxes and cut federal spending, the Congressional Budget Office said yesterday in a midyear report.
But if Congress does not abide by its fiscal 1984 budget resolution--and leaders have indicated it may not--the deficits will remain in the $200 billion range beyond the middle 1980s and could choke off the economic recovery by keeping up interest rates, the CBO said.
The budget resolution calls for spending cuts and $73 billion in tax increases through 1986. Senate Finance Committee Chairman Robert J. Dole (R-Kan.) said in an interview earlier this week that such tax increases are "out of the question . . . . That budget resolution is going nowhere."
The budget deficit this year will be a record $207 billion, $13 billion more than estimated last February, the CBO said. Increased outlays and reduced federal revenues caused by the recession are to blame, the agency said. They have not been offset yet by the recovery.
For future years, however, the CBO is more optimistic than it was in February, when it showed deficits continuing to increase. The congressional agency is not as optimistic as the Reagan administration, however, which is projecting a $179.7 billion deficit in fiscal 1984, dropping to $129 billion in 1986.
The CBO forecast that the deficit would be somewhere between $183 billion and $192 billion next year, assuming congressional compliance with the budget resolution, and between $143 billion and $146 billion in 1986.
The deficit projections were expressed as ranges because they depend on what is done with contingency funds that Congress placed in the budget resolution. These funds would become available only if Congress authorized some new recession-relief programs, which appears unlikely.
The CBO in some instances is predicting faster economic recovery and lower unemployment than is the administration. But despite strength so far, "This recovery looks to be quite precarious largely because of high interest rates and uncertainty surrounding the future course of monetary and fiscal policy," the CBO warned.
"The main point is major action will be necessary to implement the budget plan if the deficits are to come down," said outgoing CBO Director Alice M. Rivlin.
Congress and the administration have been scrapping over the budget, with the administration wanting more defense spending and less for domestic purposes. The CBO said this creates "a strong possibility that the deficit reduction measures will not be realized" in the budget resolution.
Dole said in an interview that he hopes House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.) and President Reagan can get together in a budget summit when Congress returns Sept. 12.
"We need some hint from Ron and Tip that they want to play," Dole said. Reagan has repeatedly said he is against tax increases before fiscal 1986.
The CBO forecast assumes that the budget resolution will be followed, nominal growth of the gross national product will be about as contemplated in the Federal Reserve Board's targets for growth of the money supply and that there will be no commodity price shocks. The forecast also assumes no sharp interest rate increases.
The CBO predicted that the GNP would grow at a 5.8 percent rate during 1983 and 4.3 percent during 1984. It also projected that the unemployment rate will decline to 8.9 percent by the end of 1983 and to 8.2 percent by the end of 1984.
Consumer spending will grow rapidly during the second half of this year and business investment "is expected to make a major contribution to growth in 1984 in response to the cyclical increase in capacity utilization and to business tax cuts," the report said.
The recent rise in interest rates will moderate growth of residential construction and other interest-sensitive areas during the remainder of this year and next.
Inflation will increase by 4.6 percent this year and by 5 percent in 1984, the CBO projected.