Shaky Budget Preview

U.S. budgets are always rather dubious documents, based on tenuous guesstimates of anticipated revenues and expenditures. Even in this uncertain com pany, though, the spending plan for fiscal 1975 that President Nixon will un veil next month will stand out as an exceptionally shaky exercise in pondering the imponderable. The big unknown, of course, is the effect of the energy crisis, which could plunge the U.S. into a recession, slash Government tax revenues, and force big additional outlays for new job programs to ease the impact of unemployment. Whether or not Nixon formally proclaims the figure, the budget could well run a deficit of $15 billion, nearly double the red-ink figure that now looks likely for the current fiscal year.

Complicating the budgetmakers' problem in striking the proper balance between federal income and spending will be an attempt by the Administration to finally define what it means by "full employment." For twelve years, the official numerical definition has been a 4% jobless rate; Nixonian economists have long grumbled that that goal is now unrealistically low, but they have never set a new target figure, and have often said that there should not be one. To ensure that the budget gives just enough boost to the economy, however, they have concluded that they have to pick a number. Officials of the Treasury Department, Office of Management and Budget and Council of Economic Advisers are framing a new goal that will probably be between 4.5% and 4.8%.

That does not necessarily mean that the Government should not try to get job lessness lower; it does mean, in the Administration's view, that trying to do so by manipulating the level of demand in the whole economy would produce more inflation than jobs.

Though the revision may seem a rather lame attempt to explain away the Administration's failure to reduce unemployment below this year's average of 4.9%, many liberal economists agree that some redefinition is needed. Recent unemployment rates have been persistently higher than in the past because of a huge influx of female, nonwhite and teen-age would-be workers, many poorly educated and unskilled, into the labor force. These people have trouble finding jobs even in a boom economy; the best way to help them may be by expanding job training programs and making structural changes in the employment pattern.

Crucial Question. Though these concepts are widely accepted, that still leaves the problem of measuring what is full employment--that is, the level of joblessness that would be achieved by operating the economy close to capacity without generating too much inflation. The question is crucial because economists inside and outside the Administration now measure the stimulative or depressing effects of budgets not by what the balance between spending and revenues actually is, but by what it would be if the full-employment target were reached. Events in fiscal 1973 demonstrated how important a miscalculation can be. Partly because unemployment was higher than 4%, economists believed that there was a good deal of slack in the economy. The Government accordingly permitted a budget deficit of $14.3 billion in fiscal 1973, and it proved too much of a stimulus for an economy that was already straining close to its limits. The result: a burst of demand-pull inflation and a spate of shortages that forced President Nixon to clamp on another wage-price freeze and institute Phase IV. Had the full-employment target been set higher, the overheated condition of the economy might have been discerned sooner.

That is history, for next year, everyone agrees that an economy held back by the energy shortage will need some budgetary stimulus. The question is how much. At the moment, OMB Director Roy Ash and other top budgetmakers are trying to keep the deficit under tight rein and cure the unemployment problem partly by creating new --and relatively cheap--job programs, like expanded public service employment. Last summer Ash gave Government departments budget targets that totaled about $292 billion, which was then expected to just about match anticipated revenues. The expenditure figures, though, must now be increased by $8 billion or so to cover, among other things, new spending programs that Congress has already approved, the replacement of military equipment given to Israel during the Middle East war, and the funding of stepped-up energy research and development. All told, these additions could produce $15 billion worth of red ink as the expected slowdown eats deeply into tax revenues. Although the deficit itself will not cause much inflation, fuel scarcities and shortages of other goods will assure that prices will continue to rise sharply.

Because of this prospect, the Federal Reserve Board--whose crusty chairman, Arthur Burns, has sometimes complained that the Fed has been forced to shoulder too much of the burden of fighting inflation--will only gradually relax its tight grip on the nation's money supply. In late summer, the board indulged in a bout of miserliness that resulted in sky-high prime lending rates and shortages of funds for mortgages.

Last week some signs of a loosening appeared when the Federal Reserve unexpectedly bought up Treasury bonds on the open money market, a move that had the effect of increasing the amount of money banks have to loan. Some of the cash flowed momentarily into the pockets of Christmas shoppers, who went on one last spending spree before 1974, which is fast shaping up as a year of rising prices, product shortages and higher joblessness.

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