Budget director David A. Stockman, in an unusually blunt, closed-door session with business leaders, has warned that unless President Reagan and Congress agree to raise taxes or massively cut spending, the federal deficit likely will remain in the $200 billion range through 1988.
Even the austere budget approved by the Senate, and endorsed grudgingly by Reagan, "would mean nearly $200 billion deficits each year" unless the economy outperforms the expectations of the nation's 50 leading business forecasters, Stockman said in a June 5 speech to directors of the New York Stock Exchange.
The administration is relying on its more robust economic forecast in asserting that the Senate plan would almost halve the current deficit by 1988.
"As a policy matter, it is obvious enough that to close this threatening $200 billion budget gap we must either massively cut spending or raise taxes by large, unprecedented magnitudes -- or by the lights of some, enact a sweeping mixture of both," Stockman said in the speech, released yesterday.
Office of Management and Budget spokesman Edwin L. Dale Jr. released the speech after Reagan and Stockman became angered by an account of it in yesterday's New York Times, headlined: "Stockman Says Tax Increase May Be Best Budget Solution."
Administration officials said the report created an impression that Stockman favors a tax increase. Stockman laid out alternatives to spending cuts, including tax increases, but did not endorse a tax increase. The administration went to unusual lengths to make this point. White House spokesman Larry Speakes told reporters that the author of the article "ought to have his mouth washed out with soap," and Reagan came to Stockman's defense before delivering a speech in Chicago Heights, Ill., supporting his tax legislation.
"We know what he said and the story is fallacious," Reagan said in response to questions about Stockman's speech. " . . . This has been a definite and deliberate misquote."
Stockman has said before that tax increases are the only alternative to draconian spending cuts in paring the federal deficit.
But in the June 5 speech, he was unusually pessimistic about the deficit, directing blame at the administration as well as the Senate and House.
"As the fiscal crisis has worsened and the political conflict intensified, we [the administration and Congress] have increasingly resorted to squaring the circle with accounting gimmicks, evasions, half-truths and downright dishonesty in our budget numbers, debate and advocacy," Stockman said.
"Indeed, if the SEC had jurisdiction over the executive and legislative branches, many of us would be in jail," he said.
In the speech, which preceded the budget impasse in a House-Senate conference committee, Stockman said the House budget would cut only $10 billion in real domestic spending. He accused the House of "egregious, shameless" distortion in claiming $56 billion in reductions.
However, even the Senate plan, which Reagan has endorsed, "rests on some pretty optimistic assumptions about the path of the economy over the next three years," Stockman said. That plan assumes 4 percent average real economic growth, no increase in inflation and a steady decline in interest rates to 5.5 percent by 1988. However, the Blue Chip consensus forecast by 50 leading business economists projects only 2.9 percent real growth, "moderately higher inflation and significantly higher interest rates," Stockman observed.