Rosy economic forecast rests on shifting ground

The administration's midyear economic review depends heavily on events which have not yet come to pass. It admits that interest rates have stayed stubbornly high. But the White House is still predicting a balanced budget by 1984, counting on further budget cuts and the passage of its controversial social security financing proposals.

The report, in essence, says that the political battle of the budget has just begun.

The midyear review, released yesterday, predicts a fiscal 1981 deficit of $55 .6 billion, up from the March estimate of $54.9 billion. But it predicts clearing economic skies by 1982, with a deficit of $42.5 billion instead of the previously announced $45 billion.

Government spending is predicted to markedly increase, mostly for reasons beyond Uncle Sam's control. Washington will have to shell out $6.1 billion more than it planned this year, and $9.6 billion more next year.

The spending overruns are "entirely attributable to higher interest rates than projected in March," says the report.

But government receipts are predicted to go up, too. In this the administration has received a political gift from the changes made in its proposed tax cut bill. Those dollars will keep rolling into the Treasury -- $5. 4 billion more this year, $12 billion more in 1982. Otherwise, the predicted deficit would have grown even larger.

But the importance of the report lies not in what it predicts for the short term, but in what it takes for granted about the long term.

Two points may be especially controversial:

1. The figures assume Reagan's social security financing proposals will become law. This accounts for $3.2 billion of savings in 1981, and $2.9 billion in 1982 -- spending reductions that were not figured into the March budget. The announcement of these proposals, in May, was not one of the administration's finer political hours. Rightly or wrongly, many pensioners saw them as an attack on their income. Criticism pelted in from many directions.

But the midyear report contains basically the same proposal, claiming "these reforms will have little impact on the present 36 million beneficiaries" and would "not only put social security back on sound financial grounds, but also lessen the future taxes required to support the system."

2. The report assumes Budget Director David A. Stockman's scissors will keep right on snipping. It predicts a $500 million surplus by 1984, figuring in "contingencies for additional savings to be proposed" of $29.8 billion in 1983 and $44.2 billion in 1984. Budget cuts may be harder to find in the next few years, as programs get trimmed closer to the bone. Mr. Stockman will probably have to try to cap "entitlement" programs to achieve the savings.

The report predicts a basically flat economy for the rest of the year, calling it "a temporary reduction in real output growth" as economic forces prepare for better times ahead. The gross national product in constant dollars, the nation's output of goods and services, is predicted to increase 3.4 percent in fiscal 1982. That almost agrees with the current economic consensus. A survey earlier this month of some 40 top business economic forecasters, taken by Blue Chip Economic Indicators, Sedona, Ariz., found their average estimate of real GNP growth in 1982 to be 3.2 percent.

Said Murray Weidenbaum, chairman of the President's Council of Economic Advisers, "I don't see a recession today in my foggy crystal ball. I see a spongy economy."

Inflation is predicted to be more moderate than thought in March. The White House is now predicting prices will rise 9.9 percent this year, instead of the previously estimated 11.1. The Blue Chip forecast survey finds inflation will be 9.8 percent for the same period. This is a further aid to the administration in its budget battle, as cost-of-living adjustments for federal workers will be somewhat less costly.

Another political minus that has suddenly become a plus is the non-enactment of the hoped-for military pay raise. This reduces projected outlays $600 million by 1982.

But stubbornly high interest rates are still frustrating the White House. In March, they predicted 91-day Treasury bills would average 11.1 percent for 1981. But the credit markets have refused to cooperate. Interest rates have clung to the heights, ignoring snorts of frustration from such high officials as Treasury Secretary Donald Regan. The midyear review now predicts 91-day T-bills will average 13.6 percent for 1981.

"Interest rates have risen to a level higher than we had anticipated," Mr. Weidenbaum told a press conference.

Like the housing and auto industries, high interest rates hit the government right in the pocketbook. It means they must pay more to finance the federal debt -- a fixed cost that would take even Mr. Stockman a long time to reduce. As a result, net interest cost estimates have risen $5 billion for 1981, and $8. 2 billion for 1982.

The administration's long-range economic assumptions remain rosy. Real GNP is predicted to rise 4.5 percent in 1984. Inflation is supposed to slow back to manageable levels, falling to 5.7 percent in 1983 and 5.2 percent in 1984.

The long-range prediction for the deficit becomes even rosier.A predicted surplus is supposed to grow to $28.2 billion by 1986, if the administration's prescriptions are followed.

All this, however, is predicated on the further budget cuts not being stymied in Congress, and the ability of the White House to handle the touchy subject of social security reform.

Stockman doesn't see any need for further expenditure cuts this year. "The fact is," he says, "Capitol Hill is having a hard time digesting the changes up there now."