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The question I'm asked most frequently these days is, When will Congress and the president deal with the deficit?

One way to answer the question is with what Wall Street calls a technical analysis. Instead of looking at the business fundamentals of a particular company, the financial world's statistical magicians often look at factors that have nothing to do with the company's performance to project what is likely to happen.

For example, they often look at the historical price for a stock. Sometimes they use computer models to determine the most likely trading range. There are even analyses for the likely impact of events such as droughts, floods and who wins the American League pennant.

So what happens if we do a technical analysis of when Congress and the president will deal with the deficit?

A Deficit History Lesson

The Congressional Budget Act and Impoundment Control Act was enacted in 1974. Although it was really not written to reduce the deficit, the Congressional Record from those debates shows that a large number of senators and representatives clearly thought this law's budget provisions would have that result.

Part of the reason a deficit reduction law was adopted in 1974 had to do with President Nixon, who railed against what he said was a Democratic-controlled "credit card Congress." But the numbers also tell a large part of the story.

In the five years from fiscal 1971 to 1975 (Congress was working on fiscal 1975 appropriations when the law was passed), the deficit averaged or was projected to average 1.8 percent of GDP each year, double the the previous five years. If there had not been such a sharp increase, Nixon's words would have been unlikely to resonate.

The next major deficit reduction plan - Gramm-Rudman-Hollings - was enacted in 1985. In the five years leading up to Gramm-Rudman-Hollings' passage, the deficit averaged almost 5 percent of GDP a year. This was almost 80 percent more than the 5-year average deficit that occurred between 1976 and 1980.

This pattern does not hold for the Budget Enforcement Act that was adopted in 1990, however. The deficit in the five years leading up the act's passage averaged almost 4.4 percent of GDP, about a half-point less than the average of the previous five years.

It is important to remember, however, that Gramm-Rudman-Hollings was widely assumed to be a failure because, as the numbers clearly show, it did not reduce the deficit as had been promised. So even though the Budget Enforcement Act in many ways was a significant change from the previous approach, the 1990 legislation can be seen as a "do over" rather than a response to a new problem.

From that perspective, that the revised deficit reduction plan was put in place in 1990 because the average deficit as a percentage of GDP from 1987-1991 was almost 60 percent larger than 1976-1980 average, the period that prompted the failed Gramm-Rudman-Hollings to be enacted.

What All Those Numbers Actually Mean

Except when the situation is perceived to be a crisis, the political system in the United States tends to react very slowly.

It would not be surprising, therefore, if - as was the case in 1974 and 1985 - a period of high deficits relative to the previous period is needed before a consensus builds to the point where action is taken. It also would not be surprising if, as was the case in 1974, 1985 and 1990, the deterioration from the previous period has to be significant. An incremental decline or a steady deficit is simply not likely to trigger real action.

If this technical analysis is correct, we should not hold our breath while waiting for Washington to act on the deficit.

If discretionary spending grows at the 8.5 percent average of the past five years, tax law is not changed, no new entitlements are approved, and the economy grows at the rate currently projected by the Congressional Budget Office, then the federal deficit will average about 1.4 percent of GDP over the next five years. This would obviously be worse than the 0.9 percent surplus recorded from fiscal 1998 to 2002. But it would also be an improvement over the 2.1 percent of GDP average deficit that occurred in the five years before the surpluses began in 1998.

The deficit will also be relatively flat as a percentage of GDP over the next five years, and so will not create the type of situation that (technically, at least) has caused concern to build in the past.

All of which suggests that Congress and the president may have to increase spending significantly or enact substantial additional tax cuts to make the deficit an issue again.

That may be likely. The 8.5 percent average increase in discretionary spending will almost certainly be exceeded from fiscal 2002 to 2003, perhaps significantly. There is general support for a significant increase in military spending; homeland security will likely cost more than is currently estimated; and there seems to be little stomach for reducing domestic spending to offset the other increases. Plus, there is also renewed talk about further tax changes.

But even with all of this, the technical analysis indicates that it will take several years of significantly higher deficits to trigger action in Washington. It could easily be 2007 or 2008 at the earliest before anything happens.

Question Of The Week

Last Week's Question. Several "Budget Battles" readers, who last week were asked last to come up with a budget-related slogan appropriate for a federal government license plate, wrote back worried that one was being considered because of its revenue-producing potential. The answer is no, at least not yet.

The winner of the "I Won A 2002 Budget Battle" coffee/tea/hot chocolate mug is Stephen Abney, who works for the Defense Logistics Agency in Wiesbaden, Germany, for "Spend all you want, we'll print more."

This Week's Question. This week's question is the perennial that "Budget Battles" asks each fall and is the easiest way for you to win a mug - even if you know nothing about the federal budget. The question: How many of the 13 regular fiscal 2003 appropriations will be enacted by the start of the fiscal year on Oct. 1, 2002?

We won't know the correct answer for several weeks, but your guess, which must be sent to scollender@nationaljournal.com, must be received by 5 p.m. EDT on Saturday, Sept. 14, 2002, to be considered. You must include your mailing address so the mug can be sent if you win. If there is more than one correct response, the winner will be selected at random from all those who guess correctly.

You Don't Need $20 Million To Ride Into Space

Some people might be willing to pay $20 million to take a ride on a Russian space vehicle. But you will be able to spend considerably less this January when National Journal, Government Executive and Fleishman-Hillard present the latest in their annual executive briefings on the federal budget - "Houston, We Have A Budget."

This half-day briefing follows last January's extremely popular "Three-Ring Budget," which used the sights and sound of the circus to explain what would happen. The briefing will be held in Washington during the week of Jan. 27-31. Big discounts will be offered for early registration and groups of more than four from the same organization. Details soon.

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