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Federal budget balancers may ax revenue sharing

WHEN Gov. James R. Thompson led a National Governors' Association delegation up Capitol Hill early this year to plead for restraints on federal spending, he didn't expect to be embarrassed. But when Thompson and two other governors appeared before Texas Sen. Lloyd Bentsen's Joint Economic Committee, he found himself in an uncomfortable situation: Bentsen, a conservative Democrat, agreed with all that he said -- and then asked for specific recommendations on programs to be cut.

Thompson didn't have an answer to Bentsen's question, but Bentsen does: revenue sharing. And that is an answer that could cause Thompson, and the state treasury, a lot of trouble next year.

Bentsen, like many other politicians here in Washington, has listened to the call for a balanced federal budget emanating from many state legislatures. His answer -- shared by President Carter in 1976 -- is to eliminate general revenue sharing for the states -- a $2.3 billion program whose end would give pause to those state officials calling for a balanced budget. Bentsen uses state revenue sharing as an example of budget-balancing problems: little, he says, can be cut beyond what has already been trimmed.

The problem is more complex than balanced-budget opponents or advocates believe, and the complexities raise questions about whether a balanced federal budget is either obtainable or desirable. To proponents of a balanced budget, the problem is simple. Just as an individual must balance his or her checkbook, the government must balance its books. Not doing so, argue proponents of a balanced budget, is the prime and/or sole cause of inflation.

Opponents say a balanced budget is a sure way to drive the nation into a recession. By suddenly removing the artificial stimulus of excess government spending from an economy which already has an unemployment rate hovering around 6 percent (5.8 percent in Illinois), the government would idle even more of the nation's productive capacity, causing a business downturn. Right now, private enterprise has neither the will nor the inclination to invest in or create demand for the amount of goods and services necessary to keep the economy going. Government must help out, say liberal opponents.

Both sides overlook some key points. One of them is Bentsen's: what -- legally and politically -- can be cut? General revenue sharing is one of the few available programs. Cutting out the program for the states in fiscal 1980 by refusing to reauthorize the program when it expires, would help balance President Carter's $532 billion budget.

But cutting out general revenue sharing for the states would cut out about 20 percent of the anticipated revenues in Gov. Thompson's budget, throwing it so far out of balance that drastic cuts in expenditures or increases in taxes -- both politically unpopular --would be necessary. Thompson has defended revenue sharing to the states in a recent speech.

Another overlooked point is that a balanced federal budget would, if opponents are correct, cause a rise in unemployment. The corresponding rise in unemployment compensation benefits, paid by the state ofttimes with loans from the federal treasury, would produce a state deficit, as would declining tax revenues from rising unemployment. Appropriating the necessary funds for the loans would unbalance the federal budget again.

Since one of the few economic verities that has remained constant in the past decade is the correlation between the lessening of the deficit and rising unemployment -- ask President Ford, for it may have cost him the 1976 election -- the effects mentioned above could come to pass. And since Illinois is still trying to repay the last set of federal unemployment compensation loans, Thompson's budget would be thrown further out of balance.

In recent days, the question has also been raised, notably by administration spokesmen, as to whether the budget for government really is unbalanced. They claim -- legitimately -- that the federal deficit is offset by a state/ local government surplus of equal size. It should not be forgotten that the balanced budget drive took on steam after passage of California's Proposition 13, and California had a $7 billion surplus. Surpluses soak up the excess money and deflate the economy, according to traditional theory. For these reasons and many others, thoughtful conservatives (among others) are leery of the balanced budget drive. House Republican whip Robert H. Michel(R., Peoria), when asked, said point-blank that he did not support a balanced budget. He favors cutting the fiscal 1980 deficit to $19 billion. For him, a suddenly and perfectly balanced budget is too drastic an economic cure.

Those who would cut the deficit even more have plenty of ammunition, however, and should not be discounted. Michel's approach in the past has been on the order of across-the-board percentage cuts in all domestic spending programs. Too many liberals consider all social spending sacrosanct. A more inviting target, however, might be to go after the amounts lost through waste and fraud in all federal departments, along with the excess numbers of bureaucrats used to administer everything, but that approach -- Carter's approach -- is still in its infancy.

July 1979 / Illinois Issues / 32