Limits on Federal Spending

Report Outline
Post-election spending debate
Previous Attempts to Cut Spending
Prospects for Budgetary Reform
Special Focus

Post-election spending debate

Fears Arising Over Federal Budgerary Deficits

The Federal government faces three choices as the budget for fiscal year 1974 is being prepared, none of them palatable. It may cut back spending or it may raise taxes to balance the budget. Or it may do neither and thus permit another large deficit—a course which would be sure to spread new inflation through the economy. Economists believe higher taxes will be the inevitable choice because the government is either unwilling or unable to cut its spending programs. In a real sense, the budget is running out of control. Caspar W. Weinberger, director of the Office of Management and Budget (OMB), has told Congress, “The clock is running out; there can be no question that the time for fiscal responsibility is now.”

Ironically, Weinberger's comment came as he asked Congress to increase the temporary ceiling on the public debt from $450 billion to $465 billion. This action was necessary for the Treasury Department to borrow money to finance the deficit being run up in the current fiscal year ending June 30, 1973. Based on the President's desire to hold the year's spending to $250 billion, Weinberger's office estimated in September that the deficit will amount to $25 billion. Private economists are thinking in terms of $35 billion to $40 billion. No one is forecasting a deficit below those incurred in the past two fiscal years—1971 and 1972—of $23 billion each.

While budgetary deficits are a strong stimulus to the economy during recessions, they are widely believed to be inflationary during a period of recovery, like the present. Although committed to fiscal restraint, the President has defended a deficit in fiscal 1973 as necessary. He has said the budget would show a $700 million surplus if there was full employment. Under the full-employment-budget doctrine, a deficit “provides necessary stimulus for expansion, but is not inflationary” as long as expenditures do not exceed the revenues that would accrue to the government under conditions of full employment. Others argue that this is specious reasoning invoked to cloud the issue. Moreover, they say adherence to the concept of full-employment budgets is a leading cause of inflation.