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March 5, 1 982

Defi ci t Financing Pressures
Congress returned from its WashingtonLincoln Day recess determined to do something about reducing the size of the Federal
deficits extending beyond recession year
1 982. The magnitudes involved are $98.6
billion ("body temperature deficit") in the
present fiscal year and -according to Administration estimates-steadily declining
series of deficits thereafter, from $91.5 billion
in 1 983 to $53.2 billion in 1987. As a
percentage of GN P, the deficits would
decline from 3.2 percent in 1982 to 1.1
percent in 1987. But since many outside
ana Iysts question these estimates, 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 pressLiresoutside the regular budget process.

for inflation-sensitive programs -sLich as the
indexed social-security program-may be
roughly $1 V2billion above original estimates
this year.
Interest rates ary another important factor
accounting for the higher '82 deficit. The
recent shift toward higher interest rates substantially increases estimated interest costs
for the public debt, and for other interest-ratesensitive programs such as subsidized housing-credit programs. Higher projected
deficits also add to total interest costs. In
1 982, these factors add an estimated $16 %
billion to budget outlays, compared with last
year's original estimate. Indeed, over the
1 982-84 fiscal period, total outlays could be
$84 billion more than originally estimated
because of higher-than-expected interest
costs.

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 expanded because of larger-than-expected
interest payments and lower-than-expected
inflation rates.
Because of the recession, real GN P 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 GN P base, plus lower taxable
incomes associated with these revised forecasts, could reduce 1982 receipts by $31
billion below the original estimate. Also,
outlays for unemployment-sensitive programs may be $8 billion more than the
original 1 982 estimates. Meanwhile, outlays

Lowerpost-'82deficits
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 estimates are some crucial assumptions about
real GN P growth. In this regard, the Administration's estimates are somewhat more
optimistic than those of private forecasters.
The Administration expects real GN P to
increase by 3.0 percent in 1 982 (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
1 982-87 period are consistent with the fiscalpolicy initiatives adopted by 1981 legislation.
Federal spending cuts, according to this

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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.

------------_._,

. _--,

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.

argument, would contribute to a more efficient 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.
Progresstowards the Administration's growth
projections for the mid-1 980s may be hampered by a slowdown in the growth of the
working-age population. During the 1 965-80
period, average labor-force growth reached
2.3 percent a year, but such growth may
decline to 1.7 percent or less in the 1 985-87
period even with a projected increase in
labor-force participation rates. For these and
other reasons, the Congressional Budget
Office and some private research organizations believe that real GN P 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 Administration is anticipating.

.i •

financing off-budget entities
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
$1 1 8.2 billion in fiscal 1982 and $107.2
billion in fiscal 1983. Off-budget deficits
would account for 17 percent of the total in
1 982 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 obligations. These other programs remain both
legally and administratively within the agencies 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 importance-such as the Rural Electrification and
Telephone revolving fund and the foreign
military-sales credit program.

Deficit reductions
The attainment of the Administration's
budget plan depends not only upon the realization 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 currentservices (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 proposals, 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 discretionary budget programs, ranging from
agricultural research to housing subsidies
and manpower training. More than onefourth of the prospective deficit cuts would
cover the area of management initiativesincluding programs to reduce fraud and

federally-assistedborrowing
The Federal government's presence in credit
markets will be felt not only from its borrowing to finance the total deficit but also from its
assistance to certain public borrowing activi2

Federal and Federally-Assisted Borrowing
as a Percent of Total Funds Raised

$

200
Percent

40 rFiscal
Years
30
20

150
100

-

10
0
1972

I

50

1976

1980

1966

1983e

1970.

1974

1978

1982

Estimatesfor 1982 and 1983 - Federal
ReserveBankof SanFrancisco.

Estimatesfor 1982 and 1983 Administration budgetdocument.

ties. These include government-guaranteed
borrowing and borrowing by governmentsponsored enterprises.

Overall financing impact
The overall impact of the Federal presence in
credit markets can be measured by adding
government-guaranteed and governmentsponsored borrowing to the borrowing
associated with the financing of the unified
budget and off-budget programs. Total Federal and Federally-assisted borrowing may
rise from $1 42 billion in 1981 to $206 billion
in 1982 (accord1ng to Administration estimates), with substantial increases scheduled
in all of these categories. (Guaranteed borrowing and sponsored-enterprise borrowing
are shown net of repayments, in order to
remove double counting in the total figures.)

Guaranteed borrowing consists of loans to
non-Federal entities, for which the Federal
government guarantees or insures the payment of the principal and/or interest, in
whole or in part. The loan guarantees are
contingent liabilities of the Federal government, 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 1 982, largely as a means
of supporting the housing market-60 percent of all loan guarantees in both 1 982
and 1983 will be associated with Federal
guarantees of mortgage-backed securities of
the Government National Mortgage Association (Ginnie Mae).

About 55 percent of total Federal and Federally-assisted borrowing during the 1 981 -83
period represents borrowing to finance the
combined (unified and off-budget) deficit.
Historically, and especially during recessions, 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 governmentguaranteed and sponsored-enterprise
borrowing.

The other type of Federally-assisted borrowing 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 Mortgage 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. Borrowing by these enterprises may increase from
$35 billion in 1981 to $47 billion in 1 982.
Such borrowing has increased substantially
in recent years and is expected to do so again
this year, largely because of the sharp increase in lending and borrowing by housingrelated enterprises that typically occurs
during periods of high and rising interest
costs.

Total Federal and Federally-assisted borrowing 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 1 976 and
(according to our staff estimates) could
approach 57 percent in 1 982 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 Congressional attempts to control the deficits are not
successful, the Federal presence will remain
dominant in the next several years.

RoseMcElhattan

3

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BANKINGDATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)

Selected ssetsandLiabilities
A
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)

Weekly
Averages
of DailyFigures
Member
Banle
Reserve
Position
Excess Reserves (+ )/Deficiency

(-)
Borrowings
Net free reserves (+ )/Net borrowed (- )

Amount
Outstanding

2/17/82

Change from
year ago
Dollar
Percent

Change
from

2/10/82

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
Weekended

926
947
667
102
10
53

-

11

-

32
2,914
876
38
924
-1,051
-1,123

-

-

-

Weekended

2/17/82

2/10/82

151
63
88

79
30
49

11,078
12,219
6,058
5,200
53
434
454
666
1,257
2,003
895
12,932
13,113
4,797

-

7.5
9.8
16.5
10.2
0.2
28.8
6.8
4.2
2.9
7.0
3.0
16.8
19.4
15.9

Comparable
year-ago period

49
109
60

* Excludes trading account securities.
# Includes items not shown separately.

Editorial
comments be addressed theeditor(WilliamBurke) to theauthor.... Free
may
to
or
copies this
of
andotherFederal
Reserve
publications beobtained calling writingthePublic
can
by
or
Information
Section,
Federal
Reserve
Bank SanFrancisco, Box7702,San
of
P.O.
Francisco
94120.Phone
(415)544-2184.