Washington shift: balanced budget out, tax cut likely

Almost nobody in Washington puts much faith in a balancing of the budget for fiscal year 1981 (starting Oct. 1). Practically everybody in Washington expects a tax cut.

If prsent rate, President Carter's hope-for balanced budget will fade out of reach. By one estimate, each 1 percent rise in national unemployment costs the US Treasury $20 bilion in lost revenues and unemployment payments.

In an extraordinary leap, unemployment rose 1.6 points in two months to 7.8 percent in the lates figures -- the largest increase over such a period in history.

Mr. Carter continues his official position that the budget shoud and will be balanced, and his spokesmen remain silent on the question of a tax cut. However , it is acknowledged that a far-reaching if not violent swing has occured in the business cycle, and that the emphasis is shifting from the problem of inflation to unemployment.

The change in statistical signals came last week with simultaneous news that startled economists: a big increase in joblessness and a remarkable decline in inflation. The US Labor Department's producer price index for finished goods rose only 0.3 percent in May, an annual rate of 3.6 percent before compounding. The April figure was at a 6 percent annua rate. Like buckets hung in a New England well, the recession pail was coming up, the inflation pail going down.

A fortnight back Treasury Secretary G. William Miller was telling Congress that President Carter was firmly in favor of the balanced budget and that the goal was in sight. The goal has symbolic importance because many believe that government spending is the major, if not sole, cause of inflation. Balancing the budget, it has been hoped, would put a pyschological brake on rising prices.

The inflation wave now appears to have crested and begun to decline, while the unemployment wave rises. Politicians are expected to turn attention to the latter in the developing exlection debate. Most estimates here calculate that unemployment, now at 7.8 percent (and the highest in the Carter term of office), will rise higher, probably to 9 percent or more. That could add another $20 billion to government budget expenditures.

Other factors also push toward red ink: Congress wants more for defense, and is likely to overrule Mr. Carter. And Congress has killed Mr. Carter's 10 -cents-a-gallon oil fee program which would have offered a $10 billion boost to 1981 revenues.

The Carter fluctuation between the fight against inflation, and now against recession has been violent.

On taking office in 1977 the enemy seemed to be a business slump, and Mr. Carter proposed tax cuts and government spending to stimulate the economy.

Unemployment diminished, however, and runaway inflation seemed threatened; the government leaned the other way on the economic seesaw. The Federal Reserve Board dramatically imposed credit controls and other restrictions on March 14, 1980. The administration dropped proposed tax cuts and pulled back its first budget this year and offered a new anti-inflation budget a month later. Now things seem to be changing again.

Washington is going through a remarkable change of mood and direction accompanying the election.

Republican presidential candidate Ronald Reagan already blames Mr. Carter for the inflation and for the unemployment increase.

The President, perhaps, will point to private forecasters who took the same view as the administration on the erratic economy. Meanwhile, hopes for a balanced budget seems all but submerged for the time being.

Republicans are already widely committed to a tax cut. Presidential candidate reagan has accepted the outlines of a proposal by Rep. Jack Kemp (R) of New York for a 10 percent across-the-board income tax reduction each year for three years, to be accompanied by possible reduction in federa spending. President Carter, in guarded statements, has postponed a decision on a tax cut until August, presumably waiting for the Democratic convention Aug. 11-14 in New York City. Private economists are almost unanimous that if the recession deepens a tax cut will be indicated by both economics and politics.

Heavy indirect tax increases are automatically scheduled. social security payroll taxes increase $17 billion starting Jan. 1, 1981. Rising energy costs will add around $25 billion. Inflation is pushing income-tax payers into higher brackets -- a figure estimated at $15 billion. This makes an impressive total boost of $57 billion.

It seems unlikely in an election year for congressmen not to intevene if the recession deepens. Mr. Carter might, indeed,call a special session to deal with it.