By all accounts, the federal budget deficit is spinning out of control. Although the final figures for fiscal 1991 are not yet in, most estimates put the number at about $275 billion-far above the previous record shortfalls of $220 billion recorded in fiscal 1986 and 1990. The picture looks even more ominous in the year ahead. Just a few short months ago, both the Administration and the Congressional Budget Office raised their projections of the fiscal 1992 deficit by some $68 billion-to $348 billion and $362 billion respectively.
On the surface, the saving grace in this coming torrent of red ink should be a tonic effect on the economy, since deficits generally are regarded as stimulative. But, as economists well know, it is not the nominal budget deficit that measures the thrust of fiscal policy. To the extent that budget deficits always rise during recessions as tax revenues decline and spending for such items as unemployment benefits accelerates, they have little impact on economic activity. It's only when one removes the automatic impact of cyclical changes on the budget that the potential stimulative effect of fiscal policy becomes clear.
The so-called standardized employment deficit does just that. To calculate this measure, the CBO has also removed borrowing outlays for deposit insurance from federal expenditures, since these are simply reinjected into the credit markets and don't affect overall demand.
What the CBO's cyclically adjusted deficit shows is that the budget was mildly stimulative in fiscal 1991. But most of the huge increase in the nominal deficit in the year ahead appears to reflect the combined impact of the recession and the thrift bailout. The standardized deficit is projected to widen only slightly in the current fiscal year (chart), providing little fiscal stimulus or restraint.
Other measures support this assessment. Economist Douglas Lee of Washington Analysis Corp. likes to remove interest expenses from the standardized deficit, for example, because interest outlays "tend to be recycled in the credit markets, whereas government spending on goods and services has a strong multiplier effect on the economy." Such an adjustment produces a budget surplus of $39 billion in fiscal 1990, which declines to $20 billion in both fiscal 1991 and 1992. In short, says Lee, "it points to modest stimulus in fiscal 1991, followed by neutrality this year."
The standardized employment deficit as a percent of gross national product tells a similar story. According to the CBO, this measure jumped from 2.6% of gnp in fiscal 1990 to 3% last year but will rise almost imperceptibly, to
3.1%, in fiscal 1992. By contrast, economists Robert Giordano and Edward McKelvey of Goldman, Sachs & Co. point out that the cyclically adjusted deficit has widened by an average 1% of gnp during the first year of five of the past six recoveries.
"The economy is missing its usual dose of fiscal steroids in this recovery," say Giordano and McKelvey. "Although there are rumblings of strength, and we believe that real gnp could rise by 4% in the next four quarters, it's unclear how much the lack of fiscal stimulus will hamper growth."