DEFICIT CUTS SEEN UNABLE TO CURE TRADE DEFICIT
Financial analysts say they are
pleased with congressional moves to trim next year's federal
budget deficit but believe the actions will do little to help
improve the U.S. trade deficit or buoy the economy.
    The House of Representatives is expected to vote tomorrow
to approve a trillion-dollar budget blueprint for the coming
fiscal year that reduces the deficit by 38 billion dlrs.
    Similarly, the Senate Budget Committee has approved a plan
that would cut federal red ink by about 37 billion dlrs next
year.
        "In terms of the economy, 37-38 billion dlrs is
infinitesimal, so cuts of this magnitude will have little
impact on the economy and the trade deficit," said Stanley
Collander, a Touche Ross federal budget policy analyst.
    "At best, it will have a small positive effect," Collander
said in an interview.
    Federal Reserve Board Chairman Paul Volcker has repeatedly
told Congress that cutting federal red ink would go a long way
to help reduce the massive trade deficit and also help ease
some of the downward pressure on the value of the dollar.
    The U.S. government has attempted to remedy the trade
imbalance by driving down the value of the dollar. But Volcker
has warned that a further fall in the dollar's value is fraught
with danger.
    Such a decline, he has said, could refuel inflation as
imported goods become more expensive and chase away foreign
capital needed to finance the federal budget deficit.
    In addition, in February, U.S. officials meeting with other
major industrialized nations in Paris agreed that the value of
the dollar had dropped enough and that world exchange rates
should be stabilized at around current levels.
    As part of that agreement, Japan and West Germany agreed to
take steps to stimulate their economies and the United States
agreed to cut its budget deficit.
    The alternative to driving down the dollar any further as a
way to deal with the trade deficit, Volcker said recently, is
to reduce U.S. consumption, particularly federal spending.
    "If you don't deal with the budget deficit, everything else
you do is going to be counterproductive," Volcker said in recent
testimony before the Senate Banking Committee.
    Volcker also said he would prefer to further tighten the
government's purse strings than have the Fed tighten the credit
supply if action was needed to fight inflationary pressures or
to assure the continued flow of foreign capital into the United
States.
    Analysts say that Fed tightening now could choke off the
current modest economic expansion and threaten a recession.
    Kemper Financial Services economist John Silvia stressed
that any deficit reduction was better than none.
    But he said the size of the cuts under consideration were 
not enough to give the Federal Reserve Board the flexibility it
needs to steer the economy or to keep the value of the dollar
from plunging further in world exchange markets.
    "There's no doubt that some deficit reduction helps, but if
your objective is to stabilize the dollar and perserve the
Fed's flexibility to conduct monetary policy, then the answer
is, it's not enough," Silvia told Reuters.
    The U.S. trade deficit has become one of the government's
most vexing and persistent problems.
    The 1986 deficit was 169.8 billion dlrs and there is as yet
little indication that this year's figure will be any lower,
though administration officials have predicted it will drop by
about 20 to 30 billion dlrs by year's end.
    In the past, Volcker has joked that he never lost sleep
worrying whether Congress would cut too much fat from the
federal budget.
    On the other hand, he also has made it clear he is not
attached to the gradually declining deficit ceilings set for
the 1986-1991 period by last year's Gramm-Rudman balanced
budget law.
    While the new law set a ceiling of 108 billion dlrs for
next year's federal deficit, both the House and Senate Budget
Committees have conceded that their budget plans would fall
short of the deficit reduction goal by about 25 billion dlrs.
    "For political reasons, 35 to 40 billion dlrs is about the
most you're going to get" out of Congress at the present time,
said Touche Ross's Collander. "To do something more than that
would be extraordinary, remarkable and very, very difficult."
    Collander said the real danger for Congress was to end up
short of the deficit reduction goal set by its Budget panels.
    "To an extent, this has become the minimum acceptable
reduction level," he explained. "Anything less than that will now
look like a failure to Wall Street."
    The budget plan now under debate on the House floor would
lower an estimated 171 billion dlr deficit for the year
beginning on October one to about 133 billion dlrs by cutting
defense and domestic programs by 38 billion dlrs from their
anticipated spending levels for next year.
    The Senate Budget Committee has called for a deficit of
nearly 134 billion dlrs with about 18.5 billion dlrs in new 
taxes and about the same amount in spending cuts.
 Reuter
