P o k h (1987) 1, 14-20

PRESIDENT REAGAN’S FISCAL POLICIES: THE

RECORD OF HIS FIRST TERM
Joseph J Hogan
RONALD Reagan came to office in 1981 with an economic plan to fight what most Amen-
voters and politicians, includingJimmy Caner, strongly r&ded as-unacceptably high ~ C S
of inflation and unemployment, as well as damagingly low production, investment and
economic growth rates (Abramson ef al, 1983). The nav President’s economic plan Sought to
tackle these problems by effecting five major politico-economic objectives: to reduce
dramatidy the nondefence spending of the federal government, to rebuild rapidly the
nahn’s defences, to promote economic growth by restoring incentives through massive Cuts
in federal revenues, to balance the budget in f i s d 1984, and to lower inflauon rates bY
restraining monetary growth (Barrett, 1984; Hedo and Penner, 1983). Because the Federal
Reserve Board since October 1979, had been pursuing a policy of depressing mOnetaLy
growth, President Reagan had to Concentrate on effecting the fiscal components of his
economic strategy. The incoming administration decided to fold the President’s fiscalPolides
into the annual executive budget for fiscal 1982,and then sought to implement these policies
via the congressional budget process (He&, 1984; Mills, 1984; Palmer and Mills, 198%
Pfifiner, 1983).The purpose of this essay is, using recently published budget and related
materials that cover the President’s first tern, to assess the extent to which President Reagan’s
first administration was successful in achieving his fiscal policy objectives.
In overall terms, President Reagan succeeded handsomely in his intention to lower federal
taxes; he also succeeded in obtaining a sharp acceleration in the amount of money spent on
national defence. President Reagan failed to achieve the initial reductions that he sought in
nondefence spending, but he managed to significantly lessen the total amount spent on non-
defence programmes. However, the Reagan administration failed to produce a balanced
budget in fiscal 1984. Instead, the 1983 fiscal budget produced a record peacetime deficit of
208 billion, with even larger deficits forecast for later on in this decade. The major develop-
ments in each of these areas will now be summksed.

Revenues
The federal tax burden increased from I 8.5 percent of gross national product ((XU” at the
end ofthe Eisenhower administration (Mills, 1984)to (asindicated in table 1) 21.6 percent of
GNP in fiscal 1982. The first Reagan adminiswation suceeded in dramatically reducing this
longterm trend towards increasing the total of federal revenues. The provisions of the
Economic Recovery Tax Act of 1981 were largely responsible for quickly reducing federal
revenues to 18.6 percent of GNP in fiscal 1984. Indeed, it h a h e n estimated by the
dent‘s Officeof Management and Budget that the 1981 Tax ~a reduced federal revenues bY
$963 billion over the fiscal 1981-7 period, whereas the Congressional Budget Office projects
the loss over the same period as S 1’041 billion (Hutton and ()”eill, 1982;Wehr, 1981). These
reductions far exceeded the president‘s request in his first budget submission for just Sound
$300 billion in tax cuts. But this increase in revenue IosseS was willingly accepted by President
Reagan a price worth paying in order to create an initid and positive impression in the
-
minds of the voters as a president who in sharp conmt of the voters’ perceptions of Gerald
-
Ford and Jimmy Carter as ineffective presidents could lead Congress and therefore imple-
ment his governing agenda (Omstein, 1982).
Defence Spending
The defence budget fell from 9.1 percent of GNP during the Vietnam era to around 5.2 per-
cent of GNP during the mid 1970s,before picking up to around 6.0 percent of GNP at the end
of Carter’s presidency (Mills, 1984).Although Congress trimmed President Reagan’s request
for defence spending during the second half of his first term, the president succeeded
 PRESIDENT REAGAN’S FISCAL POLICIES THE RECORD OF HIS FIRST TERM 15

both in increasing the rate of defence spending each year and in building in additional growth
- for weapon programmes that are in the spending pipeline- on defence spendingfor the rest
of the decade (see Table 1). This increase raised defence spending from 23 percent of total
federal spending in fiscal 1980 to 27 percent of total spending in fiscal 1985. Moreover, this
increase in defence spending is forecasted to continue. The Congressional Budget Office
forecasted,in February 1985, that the defence budget will consume 3 1 percent of totd federal
spending in fiscal 1990 if current policies are maintained (see Figurel).

Non-Defence Spending
During the period from 1961 to 1981 federal spending on nondefence programmes (which
consistsof nondefence discretionary, off-budget and mandatory transfer payments on federal
programmes such as old age pensions and unemployment benefits)increased dramatically,
accounting for 16.3 percent of GNP at the end of Carter‘s presidency. Although President
Reagan sought much deeper reductions than Congress was willing to accept, he managed to
lowered nondefence spending to 14.1 percent of GNP in fiscal 1984.The President’sretrench-
ment drive lowered nondefence spending from 68 percent of total federal spending in 1980 to
60 percent in 1985, with nondefence spending projected to fall to 53 percent of total federal
spending in 1990 if current policies are maintained without revision (see Figurel).

The Federal Deficit

Throughout the NixomFord era, the decline in defence spending was more than offsetby
the growth of nondefence spending. The overall growth in spending exceeded the rate of
growth in federal revenues, leading to a deficit of 2.9 percent of GNP during the NixomFord
era, which was lowered to a deficit of 2.7 percent of GNP at the end of Carteis term in office
(Mills,1984).
President Reagan’s pledge to balance the budget in fiscal 1984 failed dramatically, because
while the President succeededin massively cuttingfederal revenues he failed to reduce federal
spending proportionately. The mismatch between federal revenues and spending increased
the deficit from4.1 percent of GNP in fiscal 1982 to 6.4 percent of GNP in fiscal 1983, with the
deficit projected at above 5 percent of GNP for the rest of the decade. In dollar terms, the
federal deficit grew from $79 billion in fiscal 198 1, to $208 billion in fiscal 1983. with men
higher deficits projected for the rest of the decade (see Table 2). One immediate byproduct of
the deficit was to increase interest payments on the national debt from 9 percent of total
federal spendingin 1980 to 14 percent in 1985, with interat paymenu projected at 17 percent
of total federal spending in 1985. As a consequence, interest payments on the national debt
have become the fastest-growingpart of the federal budget since the inauguration of President
Reagan (see Figure 1). Anotherway to illustrate the magnitude of the recent increase in the size
of the national debt is by noting that between the organistion of the f d e d government in
1789 and 1980 the federal debt grew to a total of $900 billion, and then grew to twice that
amount in 1985 (Pascal,1985 p vii).

Conclusion
President Reagan’s firstterm produced a radical rearrangement of the spending priorities of
the federal budget and established a long-term and unprecedentedly high mismatch between
federal revenues and spending.The President’s insistence on staying the course with his initial
policy proposals was one of the key factors that conmbuted to the growth of the federal deficit.
Although it quickly became apparent that enacting President Reagan’s fiscal policies in 198 1
had produced a structural deficit, the president refused to revise his fiscal policies. Instead, he
remained faithful to his initial tax and defence policies and proposed to reduce the deficit by
requesting massive cuts in nondefence spending. The Congress refused to accept. To compli-
me matters, the House of Representativeswas controlled by Democrats and the Senate was
 16 JOSEPH J HOGAN

controlled by Republicans throughout Reagan’s first term, which made it almost impossible
for the two to agree, especially without the support of the White House, any prOpOS~Sto
reduce the deficit. As a result ofthis politid deadlock, the federal deficitincreased in size dur-
ing each year of President Reagan’s first term (Mills and Palmer, 1984; Piher and
Sawhill, 1984).
The federal deficit juggernaut has made it virtually impossiblefor Washington’s governing
community to consider any new policy programmes that require public expenditure. Indeed,
interest payments on the federal debt, which neither buys nor provides any public semices, are
the fastest-growing item of federal expenditure. In a desperate attempt to put the deficit
behind them Congress enacted in late 1985 the Balanced Budget and Emergency Deficit Con-
trol Act, better known as the Gramm-Rudman-Holiingsbill after three ofits leading sponson
in the Senate. The law requires automatic cuts in federal spendingprogrammes each year until
the federal budget is moved into balance in 199 1 If Congress and the White House could not
agree on how to reduce the deficit, then the legislation made provision for the implemenrnaon
of automatic across the board cuts in federd spending in order to lower the deficit to the P e
determined targets (Rauch, 1986). This attempt to put a fiscal corset on the federal govern-
ment was struck down as unconstitutional by a federal court in Washington (Brummer, 1986)-
Following this dramatic decision much attention has been given in Congress to pmposas to
CUt the federal deficit by paring the Pentagon budget and by raising new taxes, especially on
those individuals and corporations which benefitted heavily from the tax cuts made in 1981.
This suggests therefore that the areas in which President Reagan fulfilled his initial objective
during the first term are the very ones that will be most at risk in the second term.

REFERENCES
Abramson, P, Aldrich,J and Rhode. I)( I 983). change and cacinuq in thc 1980 Elections (Washington DC:
Congressional Quarterly Press).
m t , L (1984),Gambling With Hiskny: Reagan in t l wlrirc
~ HOUSC (Harrisonburg: R R b n n e u q and
Sons).
Bmmmer, A (1 986). ‘Budget Chaos Faces US After Coun Dhion’, h Guurdian 8 February, p 5.
H d o , H (1984)’‘ExecutiveBudgctMaking‘,in GMillsand J Palmer(eds).F e ~ B ~ ~ C p d r C y i n ~ ~ 9 ~ 0 ~
(Washington D C Urban Institute PRSS), pp 255-91.
Hedo,H and Penner, R (1983), ‘ F i s d and Politid strategy in h e Reagan Administration’, in F Greens-
win (&),
21-47.
* RCagan besrdcncy :An Earfy Asscssmmt (mamore: John Hopkins University M S ) , PP

Hdton, J and O’Neill, J (1982). ‘Tax P o l i q , in J Palmer and I Sawhill (eds), Ihe Reagan w’m An
Ernminution 4Economic and Social fi&s & a q a n ~ , j m k , j h h(washington DC: urban
Institute Press). pp 97-128.
Mas. G (1984);The Budget: A Failure of Discipline’, in J wmer and 1 Sawhill (4s). ? IM
Reagan &cod.‘
AsscJt~ofAmnitaC ’ Jh g & g D m e s t k IsioritieJ (Cambridge M ~ SBallinFr
: Publishing Company),
pp 107-39.
Mills, G and Palmer, J (eds) (1984), F&d Budget polrcy in the 1980s (Washington DC: urban
Institute Press),
 PRESIDENT REAGAN’S FISCAL POLICIES: THE RECORD OF HIS FIRST TERM
17

pascal, G (1985), The Tn’fwn Budgek How to Stop the Bankrupting ofAmerica (Seattle: University of
Washington Press).
pfiffner, J (1983). ‘The Cam-Reagan Transition: Hitting the Ground Running‘, AesidenEial Studies
Qparterly, 15, pp 623-55.
buch, J (1986), ‘Politics of Deficit Reduction Remains Deadlocked Despite Balance Budget Act’,
National Jounur~!,pp 15-2 1.
Wehr, E (1 98 1). ‘White House Lobbying Apparatus Produces Impressive Tax Vote Victory‘, CongressioMl
Qparterly Weekly Repott, pp 1372-73.
 18 JOSEPH J HOGAN

Table 1
Budget Projections Under 1985 and 1981 Policies
(By fiscal year, as a per cent of GNP)

1982 1983 1984 1985 1986 1987 1988 1989 1990

Under 1985 Policies

National Defence 6.1 6.5 6.4 6.5 6.8 7.0 7.2 7.4 7.6
Nondefence
programs 15.0 15.4 14.1 14.4 13.6 13.5 13.3 13.1 12.9
Net Interest ---------
2.8 2.8 3.1 3.4 3.5 3.6 5.9 3.9 4.1

Unified Budget
outlays 23.9 24.7 23.5 24.3 23.9 24.1 24.3 24.4 24.6
Revenues 20.3 18.6 18.6 19.1 19.0 19.1 19.3 19.3 19.4
Ddicit (-) or
Surplus -3.6 4.1 4.9 -5.3 -5.0 -5.0 -5.0 -5.1 -5.2

Under 1981 Policies

National Defence 6.0 6.0 5.7 5.6 5.8 5.8 5.8 5.9 5.9
Nondefence
- v s 16-3 16.9 15.4 15.4 15.1 15.0 14.8 14.6 14.4
Net Interest ----
2.8 2.7 2.9 2.9 -2.7 -2.5 -2.4 -2-2 -1.9

Unified Budget
Oudays 25.1 25.6 24.0 23.9 23.6 23.3 23.0 22.7 22.3

Revenues 21.6 21.0 21.4 22.0 22.1 22.4 22.7 22.9 23.5

Ddicit (-) or
Surplus

. a&
Source: Congressional Budget Office, % ~caomrc out&& Fiscal Years 1986-1990
(February, 1985).p 152,Table D-1.
 PRESIDENT REAGAN’S FISCAL POLICIES THE RECORD OF HIS FIRST TERM 19

Table 2
Federal Deficits, Fiscal 1981-1990

In $ Billions Percentage of GNP

Actual
1981 79 2.7
1982 128 4.1
1983 208 6.4
1984 185 5.2

Projected
1985 214 5.6
1986 215 5.2
1987 233 5.2
1988 249 5.1
1989 272 5.2
1990 296 5.3

Source: Gregory B Mills, “The Budget: A Failure of Discipline,” in John L Palmer and Isabel
V.Sawhill (eds.), The Reagan Recod-An Assessment ofAmerica’s Changing Domestic Prioritzks (1984). p
108; CongressionalBudget Office, l%e EGonomicand BudgGt olltlook Fistxi Years 1986-1 990 (Feb-
ruary, 1985), p xiv.
20 JOSEPH J HOGAN

Figure 1
56 THE ECONOMIC AND BUDCET OUTLOOK F e b m 1985

Figure 11-2.
The Composition of Total Federal Spending

1970 1980

1985 1990
Base Baseline Projution

nNondefense Discretionary National Defense

nand Off-Budget
Net Interest
IsIMandatory
Entitlements and Other
and Offsetting
Receipts