Rose McElhattan

English

Research Papers in Economics

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March 5,  1982 
Deficit Financing Pressures 
Congress returned from its Washington-
Lincoln Day recess determined to do some-
thing about reducing the size of the Federal 
deficits extending beyond recession year 
1982. The magnitudes involved are $98.6 
billion ("body temperature deficit") in the 
present fiscal year and -according to Ad-
ministration estimates-steadily declining 
series of  deficits thereafter, from $91.5 billion 
in 1983 to $53.2 billion in 1987. As a 
percentage of GNP, the deficits would 
decline from 3.2 percent in 1982 to 1.1 
percent in 1987. But since many outside 
ana Iysts question these esti mates, it wou  Id be 
useful to review the assumptions outlined in 
the Administration's budget estimates, and 
also to indicate the sources of  other Federal 
financing pressLires outside the regular bud-
get process. 
Higher '82 deficit 
To begin with, several factors caused the 
fiscal'82 deficit to be more than twice the 
size of  the $43.6 billion figure estimated by 
the Administration just a year ago. The most 
important setback to the budgetary time-table 
was the current recession. (In the President's 
words, "While the recession will end before 
this fiscal year is over, its budgetary impact 
will spillover for many years into the future".) 
However, the budget deficit also has ex-
panded because of larger-than-expected 
interest payments and lower-than-expected 
inflation rates. 
Because of  the recession, real GNP in 1982 
probably wi  II be about four percentage points 
lower than was forecast a year ago. Also, 
inflation this year could be roughly %-
percentage point below the original forecast. 
The lower GNP base, plus lower taxable 
incomes associated with these revised fore-
casts, could reduce 1982 receipts by $31 
billion below the original estimate. Also, 
outlays for unemployment-sensitive pro-
grams may be $8 billion more than the 
original 1982 estimates. Meanwhile, outlays 
for inflation-sensitive programs -sLich as the 
indexed social-security program-may be 
roughly $1 V2  billion above original estimates 
this year. 
Interest rates ary another important factor 
accounting for the higher '82 deficit. The 
recent shift toward higher interest rates sub-
stantially increases estimated interest costs 
for the public debt, and for other interest-rate-
sensitive programs such as subsidized hous-
ing-credit programs. Higher projected 
deficits also add to total interest costs. In 
1982, these factors add an estimated $16 % 
billion to budget outlays, compared with last 
year's original estimate. Indeed, over the 
1982-84 fiscal period, total outlays could be 
$84 billion more than originally estimated 
because of higher-than-expected interest 
costs. 
Lower post-'82 deficits 
Looking beyond this recession year, the 
Administration projects a series of smaller 
budget deficits in future years on the basis of 
relatively rapid economic growth, declining 
inflation, reduced unemployment, and lower 
interest rates.  Underlying these deficit esti-
mates are some crucial assumptions about 
real GNP growth. In this regard, the Admin-
istration's estimates are somewhat more 
optimistic than those of private forecasters. 
The Administration expects real GNP to 
increase by 3.0 percent in 1982 (Q4/Q4) and 
by 5.2 percent in 1983 -and  to average more 
than 4.0 percent growth between then and 
1987. Private forecasters, however, expect 
2.5 percent growth in 1982 and 4.0 percent 
in 1983 -and  expect growth thereafter to run 
closer to the 3.2-percent average actually 
achieved since the mid-1950s. 
The Administration contends, however, that 
above-average growth rates throughout the 
1982-87 period are consistent with the fiscal-
policy initiatives adopted by 1981 legislation. 
Federal spending cuts, according to this IF~cd1~1f©1n ~~~~1fW~ 
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Opinions expressed in this newsletter do not 
necessarily reflect the views of the management 
of the Federal Reserve Bank of San  Francisco, 
or of the Board 01  Governors of the Federal 
Reserve System. 
------------_._, ._--, 
argument, would contribute to a more ef-
ficient use of  resources in the economy, while 
the present tax program would substantially 
boost after-tax rewards to work, save, and 
invest. Removing the excessive burdens of 
government regulation would also reduce 
costs to individuals and businesses, and 
thereby increase the nation's productivity. 
Progress towards the Administration's growth 
projections for the mid-1980s may be ham-
pered by a slowdown in the growth of  the 
working-age population. During the 1965-80 
period, average labor-force growth reached 
2.3 percent a year, but such growth may 
decline to 1.7 percent or less in the 1985-87 
period even with a projected increase in 
labor-force participation rates. For these and 
other reasons, the Congressional Budget 
Office and some private research organiza-
tions believe that real GNP will grow about 
3.5 percent annually in the middle years of 
this decade, in contrast with the 4.4-percent 
Administration estimate. If that should 
happen, budget deficits would be somewhat 
larger in the next several years than the Ad-
ministration is anticipating. 
Deficit reductions 
The attainment of the Administration's 
budget plan depends not only upon the real-
ization of certain economic assumptions, but 
also upon a program of deficit reductions. 
The proposed savl ngs and increased tax 
receipts are measured relative to the current-
services (base line) budget, which estimates 
the outlays and receipts in the absence of  any 
policy changes. If Congress adopted all of 
the Administration's deficit-reduction pro-
posals, total savings of $239 billion could be 
achieved over the next three fiscal years. 
The largest reductions-roughly one-third of 
the total-would occur in the area of dis-
cretionary budget programs, ranging from 
agricultural research to housing subsidies 
and manpower training. More than one-
fourth of the prospective deficit cuts would 
cover the area of management initiatives-
including programs to reduce fraud and 
waste, to collect delinquent debts, and to sell 
off underused Federal property. Another 
one-fourth of  the total deficit cuts would flow 
out of reductions in the growth of automatic 
entitlement programs-which range from 
slowing the rate of increase in reimbursable 
physician fees to applying a needs test for 
guaranteed student loans. 
.i •  financing off-budget entities 
2 
The government's financing task in 1982 and 
later years wi  II be compl  icated by the fact that 
it must finance more than just the "unified" 
deficit. The outlays of a number of Federal 
entities have been excluded from the unified 
budget, although such outlays are actually 
obligations of  the Federal government. With 
the inclusion of these off-budget financing 
figures, the total Federal deficit would be 
$118.2 billion in fiscal 1982 and $107.2 
billion in fiscal 1983. Off-budget deficits 
would account for 17 percent of the total in 
1982 and 15 percent in 1983. 
Off-budget entities were established under 
various statutes beginning in the early 1970s, 
buttheirtotal outlays today are dominated by 
one organization -the Federal Financing 
Bank (FFB). The FFB's outlays do not come 
from programs it operates itselL but rather 
from purchasing the debt securities of other 
programs or purchasing guaranteed obliga-
tions. These other programs remain both 
legally and administratively within the agen-
cies that borrow from the FFB or provide its 
guarantees. The most important activity until 
recently was the purchase of certificates of 
beneficial ownership from the Farmers Home 
Administration. The Administration expects 
this program to decline in coming years and 
other programs to assume greater impor-
tance-such as the Rural Electrification and 
Telephone revolving fund and the foreign 
military-sales credit program. 
federally-assisted borrowing 
The Federal government's presence in credit 
markets will be felt not only from its borrow-
ing to finance the total deficit but also from its 
assistance to certain public borrowing activi-Federal  and  Federally-Assisted  Borrowing 
as a  Percent of Total  Funds  Raised 
Per  cent 
40 rFiscal 
Years 
30 
20 -
10  I  0 
1972  1976  1980  1983e 
Estimates for 1982 and 1983 - Federal 
Reserve Bank of San Francisco. 
ties. These include government-guaranteed 
borrowing and borrowing by government-
sponsored enterprises. 
Guaranteed borrowing consists of loans to 
non-Federal entities, for which the Federal 
government guarantees or insures the pay-
ment of the principal and/or interest, in 
whole or in part. The loan guarantees are 
contingent liabilities of the Federal govern-
ment, and generally do not require budget 
outlays except in case of  default. Such loans 
may increase from $28 billion in 1981 to 
about $44 billion in 1982, largely as a means 
of supporting the housing market-60 per-
cent of all loan guarantees in both 1982 
and 1983 will be associated with Federal 
guarantees of mortgage-backed securities of 
the Government National Mortgage Associ-
ation (Ginnie Mae). 
The other type of Federally-assisted borrow-
ing includes borrowing by privately-owned 
enterprises which were established and 
chartered by the Federal government to 
perform specific credit functions. These 
enterprises borrow in the securities market, 
under programs which are subject to Federal 
supervision, and lend their borrowed funds 
for specifically authorized purposes. The 
agencies include the Federal National Mort-
gage Association, the Federal Home Loan 
Banks, the Federal Home Loan Mortgage 
Corporation, the Student Loan Marketing 
Association, and three enterprises regulated 
by the Farm Credit Administration. Borrow-
ing by these enterprises may increase from 
$35 billion in 1981  to $47 billion in 1982. 
Such borrowing has increased substantially 
in recent years and is expected to do so again 
this year, largely because of  the sharp in-
crease in lending and borrowing by housing-
related enterprises that typically occurs 
during periods of high and rising interest 
costs. 
3 
$ 
200 
150 
100 
50 
-18~~~~~~~~~ 
1966  1970.  1974  1978  1982 
Estimates for 1982 and 1983 -
Administration budget document. 
Overall financing impact 
The overall impact of the Federal presence in 
credit markets can be measured by adding 
government-guaranteed and government-
sponsored borrowing to the borrowing 
associated with the financing of the unified 
budget and off-budget programs. Total Fed-
eral and Federally-assisted borrowing may 
rise from $142 billion in 1981 to $206 billion 
in 1982 (accord1ng to Administration esti-
mates), with substantial increases scheduled 
in all of these categories. (Guaranteed bor-
rowing and sponsored-enterprise borrowing 
are shown net of repayments, in order to 
remove double counting in the total figures.) 
About 55 percent of  total Federal and Fed-
erally-assisted borrowing during the 1981-83 
period represents borrowing to finance the 
combined (unified and off-budget) deficit. 
Historically, and especially during reces-
sions, the need to finance the combined 
budget deficit has dominated overall Federal 
borrowing. But the present recession year 
also has seen a sharp rise in government-
guaranteed and sponsored-enterprise 
borrowing. 
Total Federal and Federally-assisted bor-
rowing has increased over the past several 
decades as a proportion of the total funds 
raised in credit markets, and has come to 
dominate credit markets in recession years. 
This proportion increased from 17 percent 
during the 1960s to 30 percent in the 1970s. 
Moreover, it reached 40 percent in 1976 and 
(according to our staff estimates) could 
approach 57 percent in 1982 and 49 percent 
in 1983. Clearly, total Federal borrowing has 
come to exert a dominant influence in the 
allocation of funds raised in U.S. credit 
markets. If  the Administration and Congres-
sional attempts to control the deficits are not 
successful, the Federal presence will remain 
dominant in the next several years. 
Rose McElhattan BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT 
(Dollar amounts in millions) 
Selected Assets and Liabilities 
large Commercial Banks 
Loans (gross, adjusted) and investments* 
Loans (gross, adjusted) - total # 
Commercial and industrial 
Real estate 
Loans to individuals 
Securities loans 
U.s. Treasury securities* 
Other securities* 
Demand deposits - total# 
Demand deposits - adjusted 
Savings deposits - total 
Time deposits - total# 
Individuals, part. & corp. 
(Large negotiable CD's) 
Amount 
Outstanding 
2/17/82 
157,999 
136,713 
42,731 
56,266 
23,544 
1,941 
6,253 
15,033 
41,541 
26,536 
30,440 
89,926 
80,612 
34,883 
Change 
from 
2/10/82 
926 
947 
667 
102 
10 
53 
11 
- 32 
2,914 
- 876 
38 
- 924 
-1,051 
-1,123 
-
-
-
-
-
Weekly Averages  Weekended  Weekended 
of Daily Figures 
Member Banle Reserve Position 
Excess Reserves (+ )/Deficiency (-) 
Borrowings 
Net free reserves (  + )/Net borrowed  (  - ) 
* Excludes trading account securities. 
#  Includes items not shown separately. 
2/17/82  2/10/82 
151  79 
63  30 
88  49 
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Change from 
year ago 
Dollar  Percent 
11,078  7.5 
12,219  9.8 
6,058  16.5 
5,200  10.2 
53  - 0.2 
434  28.8 
454  - 6.8 
666  - 4.2 
1,257  - 2.9 
2,003  - 7.0 
895  3.0 
12,932  16.8 
13,113  19.4 
4,797  15.9 
Comparable 
year-ago period 
49 
109 
60 
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Deficit financing pressures

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Deficit financing pressures

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Research Papers in Economics