BUSINESS/ECONOMY

A radical approach to the deficit

MICHAEL SALTER,WILLIAM LOWTHEF,DAVID LINDORFF April 14 1986
BUSINESS/ECONOMY

A radical approach to the deficit

MICHAEL SALTER,WILLIAM LOWTHEF,DAVID LINDORFF April 14 1986

A radical approach to the deficit

For many business leaders, economists and politicians in North America, the single most important economic issue of the 1980s has been what to do about increasing public debt. The solution proposed most frequently has been to reduce government spending and borrowing, raise taxes and—eventually—eliminate deficits. To that end, in the past year both the United States and Canadian governments have introduced dramatic deficit-cutting measures. But recently some economists in the United States— and to a lesser degree in Canada—have again begun to promote what was once considered economic heresy. Many economists in private think tanks and universities now say that the national debts may be statistically exaggerated. If governments modernized their accounting systems, they say, some deficits would almost disappear overnight. Other economists claim that the time for a single-minded attack on government debt has passed. Said Carl Sonnen, vice-president of Informetrica Ltd., an economic forecasting and consulting firm in Ottawa: “The deficit is an overplayed card.”

Last February President Ronald Reagan himself reopened the controversial debate over the way that the U.S. federal deficit is calculated. In a message to Congress, Reagan said that consideration should be given to the creation of a capital budget—an accounting method widely used by corporations and cities. Supporters of a capital budget—including White House chief of staff Donald Regan—say that if Washington distinguished between annual operating expenses, such as wages, and capital spending, on such long-term investments as roads and airports, the U.S. deficit would be eliminated on paper overnight. And two weeks ago in Ottawa, Auditor General Kenneth Dye released a joint Canadian-American study on the reporting of federal financial information that, along with other findings, supported the capital budget approach.

As well, economists who disparage the current emphasis on deficit-reduction say that further harsh measures are not needed. They point to forecasts produced by Washington and Ottawa showing that the current round of budget cutbacks are already substantially easing the debt burdens. In Canada the measures outlined in the Conservatives’ November, 1984, economic statement and in the May, 1985, budget alone “started the deficit on a downward path,” said Sonnen. The cutbacks

and tax increases in last February’s budget will reduce the annual deficit still further, to $22 billion in 1991 from $34.3 billion last year, he said.

But critics of the new movement say that those economists who de-emphasize the importance of deficits still have not resolved a fundamental problem—that governments continue to spend much more than they take in through revenues.

Said Cynthia Latta, an economist with Data Resources Inc., an influential Washington research group: “The public seems to think that the federal deficit is more important than ever. We think Congress will stay committed to making substantial cuts.”

The resolve of Congress will soon be be tested. Last December the House and Senate passed the Gramm-Rudman Act, which provides for mandatory budget cuts that will eliminate

the deficit by 1991. But last January the federal Appeals Court in Washington struck down a key provision of the act that would have automatically forced Congress to pass the preset budget cuts. Now, the act is facing court challenges that may result in it being declared unconstitutional.

Still, the act has already had an impact. Anticipating its passage, last year Congress made some reductions in domestic programs—and it has reduced military spending in 1986 to below last year’s level. As well, the Congressional Budget Office and the Office of Management and Budget (OMB) have both produced studies showing that those cuts—when coupled with assumptions of falling interest rates and steady economic expansion— È should reduce the deficit to i $104 billion (U.S.) by 1991 from $206 billion this year.

At the same time, under Reagan’s plan, a capital budget would include spending on such wealth-creating items as roads, buildings or bulldozers. Because capital goods are used for many years, their cost would be financed through long-term borrowing and spread out over their expected lifetimes. A $30million warplane expected to last for 15 years would be paid for at the rate of $2 million a year, in addition to interest costs. The OMB estimates that spending on what its studies refer to as “investment-type outlays” in fiscal 1987 will be $207 billion. Deferring full payment on most of those projects under a capital budget would offset the entire projected deficit of $182 billion.

But Reagan’s proposal has aroused strong criticism from experts who claim that it is nothing more than a way of obscuring the government’s real level of expenditures. Declared Edward Hudgins, an economist with the Heritage Foundation, a conservative research organization in Washington: “It’s a way of hiding what they are spending.” During New York City’s near-bankruptcy in the late 1970s, the

city was improperly adding many items—such as salaries—to the capital budget in order to mislead its lenders, Hudgins said, adding, “The country would end up like New York City.”

Even some experts who support a capital budget, because it distinguishes between spending for consumer goods and spending to create wealth, say that it has little chance of ever being implemented. A major reason: many experts suspect that it is a method of keeping defence spending high. By placing some military items on a capital budget and deferring full payment to later years, the full cost of a military buildup would not be readily apparent, said Data Resources’ Latta.

In Canada, accountants in the auditor general’s office and in the private and public sectors in both British Columbia and Ontario are again studying the feasibility of a capital budget, according to Prof. Douglas Auld, an expert on the subject and chairman of the economics department at Ontario’s University of Guelph. A capital budget would show exactly how much government is spending to maintain and add to the basic economic infrastructure of the country— everything from hospitals and schools to ports and railways. Declared Auld: “That is a key role of government, and right now we are operating in an information vacuum.” At the very least, he said, a “detailed statement on capital expenditures should be tabled with the budget.”

As the deficit gradually declines, the Conservatives may find it more difficult to pursue some of the more controversial aspects of their political agenda, Sonnen said. The Tories have clear political goals, he added, such as reducing government waste, but they also plan to cut back some social programs. But that agenda “is being carried out under the convenient umbrella of deficit reduction,” Sonnen added. “The deficit has been used —and abused—as a rationalization for nearly everything the Tories are doing.”

If the deficit becomes a less controversial issue, Ottawa may also begin to increase spending on job creation programs, funding which it has cut back in an effort to reduce the debt. Said Ruben Bellan, an economics professor at the University of Manitoba in Winnipeg: “They should reduce taxes and increase spending in order to create jobs.” But, he added, “Wilson has done the opposite.” The Tories may yet be called to account for the pressing problem of unemployment.

MICHAEL SALTER

WILLIAM LOWTHEF

Washington

DAVID LINDORFF

New York