The Administration Is Betting on the Black

THE U.S. Government is headed for more red ink in the current fiscal year--on the official estimates. Income will hit $62.1 billion, spending $63.8 billion, for an overall $1.7 billion deficit. But are the estimates correct? In Washington last week, the talk was that they were pessimistic, that next June 30 would see the first balanced budget in five years. If so, tax cuts might be in store for the U.S. As a result, a hot debate is bubbling up. Last week Virginia's Democratic Harry Byrd, chairman of the Senate Finance Committee, said flatly that he would fight a cut in taxes. But Democrats are not in agreement: Georgia's powerful, middle-reading Senator Walter F. George favors tax cuts for low-and middle-income groups if the U.S. swings into the black.

The prospects for a balanced budget depend on two all-important assumptions : a continued cut in spending and a continued rise in revenues. Both are far from certain. One big problem is the high cost of national security, which makes up 61% of the budget. For the first three months of fiscal 1956, U.S. military spending alone was at a $36.1 billion annual rate, some $2.1 billion more than originally figured in the revised budget last August. The increased outlay for defense, however, is offset by sharp drops in other phases of the national security program. The military phases of the mutual security program for U.S. allies abroad are currently running some $1.2 billion below the $2.1 billion August estimate. Beyond that, the Atomic Energy Commission is spending less than its budget, while purchases for the national stockpile are considerably lower than forecast. Thus Administration economists think that overall spending for national security may hit the forecast of $38.7 billion on the nose, or even be down by as much as $1 billion.

The big question mark in the budget is the farm-support program. In August, estimates were that $2.2 billion would be needed for price support, some $1.1 billion less than fiscal 1955, but $1.1 billion higher than originally estimated last January. But with bumper crops and declining farm prices, no one thinks that even the revised estimates are high enough. Falling hog prices, for example, forced the Administration into an $85 million buying program a week ago.

On the bright side of the budget ledger is the continuing rise in revenues. In August, when budget planners predicted a $1.7 billion deficit, the figures were based on Government income of $62.1 billion. But the forecast underestimated the growth of the U.S. business boom. The increase in personal income is expected to push personal income tax receipts from $32.8 billion to $33.2 billion. Furthermore, corporate profits are expected to run well over the estimate of $40.6 billion, may hit $43.5 billion by year's end. Additional tax revenue: $1.5 billion. Altogether, the Treasury's income from all sources may climb to $64 billion in fiscal 1956, nearly $2 billion more than expected. Thus, the budget would balance though expenditures dropped no lower than the $63.8 billion forecast in August.

But even if the budget winds up slightly in the red, it does not necessarily rule out a tax cut. Despite all promises to balance the budget, politicians are well aware that the political sex appeal of a balanced budget is small compared to a tax cut. Furthermore, when the budget is as close to balance as it will be in fiscal 1956, a small deficit is not a vitally important factor. Though the so-called "administrative budget" is in the red, the Treasury's "cash budget," i.e., what it actually takes in, will probably show a surplus. In fiscal 1956, for example, a balanced budget would actually result in an overall cash surplus of some $2 billion. If business continues good, economic arguments for a tax cut would be weak; funneling more money into the economy would only increase the pressure of inflation. On the other hand, if business tapers off, as many economists think it may in 1956, a $2 billion cash surplus would exert a mild deflationary pressure on the economy and would accelerate any slide. Thus a midyear tax cut would step up buying power and offset the pressure.

Though many a businessman insists that the first thing to do when a surplus is in hand is to lower the national debt, the fact is that the debt does not loom so large or so menacing as it once did. In 1945 the $257 billion debt was a full 119% of the nation's gross national product of $215 billion. But in 1955, with the gross national product approaching the $400 billion mark, the debt of $277 billion has dropped to less than 69% of U.S. output. In effect, by keeping the debt from expanding much, and by spurring business to build a bigger, more productive economy, the U.S. has actually "paid off" a big chunk of what it owes itself. Thus the U.S. is working its way out of the red at a far faster rate than it could by siphoning off its money to reduce the debt itself.

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