Newspaper article The Christian Science Monitor

A Better Way to Begin the Budget Process

Newspaper article The Christian Science Monitor

A Better Way to Begin the Budget Process

Article excerpt

THE administration's latest budget deficit forecast was presented to the budget summit negotiators as a frightening and sobering new development. But the numbers are not at all surprising to most economists.

In July, the administration said that the federal budget will be $168.8 billion in the red in FY91 - far higher than its forecast of $100 billion in January. These figures do not include mushrooming costs of the savings-and-loan bailout. Why, then, did the deficit explode?

The administration blames weaker-than-expected economic growth and higher-than-expected interest rates. But to most forecasters, the economic outlook hasn't changed since January. Rather, the administration has taken off its rose-colored glasses and brought its short-term forecast into line with what the Congressional Budget Office (CBO) and private economists always expected.

What set the White House January forecast apart from the rest was its optimistic assumptions on all key variables. No one could say for sure that the administration's blend of rapid growth, low inflation and low interest rates would not materialize, but few reputable economists would bet on it. How, then, could we base the nation's budget on it?

The deficit hit the wall this year because past deficit reduction was largely manipulation. Years of rosy scenarios set us up for failure. Optimistic short-run forecasts put budget targets within reach using only timing manipulation and other accounting tricks. Forecasts that were optimistic over the long run fooled us into thinking the deficit problem would melt away just over the horizon.

This economic sleight-of-hand illustrates the critical role of economic assumptions in the budget process, and argues for a change.

To estimate how much money the government will take in, and how much we will need to spend, we must first make assumptions about the economy's performance. How much will GNP grow? Will interest rates rise or fall? Will more people be working or jobless? The answers produce estimates of tax revenues, the cost of servicing the national debt, and payments for unemployment insurance and other government assistance which determine the bottom line. …

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