WASHINGTON -- The federal budget deficit in fiscal 1992, which begins Oct. 1, will soar to a record $362 billion, the Congressional Budget Office estimated yesterday.
If that estimate proves correct, the projected tide of red ink would far exceed the estimated $279 billion deficit for this year, which in turn would be substantially higher than last year's record deficit of $220 billion, the CBO said in its semiannual report on the federal budget.
The latest forecast from the budget office is even gloomier than the one released by the Bush administration in July, when the Office of Management and Budget estimated a deficit of $348.3 billion for 1992. It is also up from the CBO's own February estimate of a $294 billion deficit.
Last fall's budget agreement between congressional leaders and the administration held out the promise of large but steadily declining deficits that would eventually bring the budget close to balance.
But the budget office said the chance of that happening "has faded even further into the future," warning that the public and government policymakers "may become restless" under the budget agreement.
The biggest factor behind the deteriorating budget outlook is the huge outpouring of outlays for failed banks and thrifts, the budget office said. It estimated that deposit insurance spending, which was virtually zero only a few years ago, is expected to reach $77 billion this year and peak at $115 billion in 1992. After that, net outlays are expected to fall dramatically as the government collects more money from the sale of assets from the banks and thrifts it acquires.
The recession, which cut federal tax receipts from individuals and businesses and boosted outlays for unemployment and other entitlement programs, is also responsible for the deterioration in the budget, the CBO said. And the budget office added that technical changes, including higher interest outlays by the government, will add to the deficit.
Allied contributions for Operation Desert Storm are expected to total $48 billion in cash and $6 billion in contributions in kind. Since the Defense Department will not spend all of the money this year, the government will record a war-related surplus of $24 billion this year and a deficit of $16 billion next year, according to the report.
The large yearly swings in deposit insurance spending and allied payments for the Persian Gulf war have little current effect on the economy and on interest rates, the budget office said. When the two items are excluded, the deficit is expected to peak at about $250 billion this year before sliding to about $200 billion in 1996.
If the impact of the recession were also to be excluded, the socalled underlying deficit would be in the range of $170 billion to $190 billion over the next several years. Such deficits in relation to the size of the U.S. economy " are no better than those of the late 1980s and considerably worse than the average of the 1960s and 1970s," the reports says.
The CBO projected that real gross national product will rise 3.3% next year, while the administration calls for growth of 3.6%. Still, the budget office warned, the possibility of a double-dip recession cannot be discounted. "There remains a significant risk that the recovery could stall after only a few months," the report says.
The budget office projected that consumer prices will rise 3.2% this year and 3.9% next year. But mild inflation is not expected to bring down interest rates. Rates on Treasury bills are forecast to rise to 6.2% next year while the yield on 10-year notes stays around 8.2%. The administration forecast calls for somewhat lower rates.
The report estimates that the fiscal cost of German reunification may already have increased U.S. real interest rates by between a half and a full percentage point, but little additional pressure should occur. Huge public spending programs planned by Japan and other Asian nations during the decade will be financed in part by tax revenues, so there would be "limited effects on world capital markets," the report says.
It also says that despite the capital needs of Eastern Europe, economic development in the region will take a long time and the willingness of foreigners to ivnest there is limited. Overall, the budget office said, it "does not expect worldwide demands for capital to cause a surge in world interest rates that will stifle the recovery."