President Clinton talks about his new budget proposal, which includes targeted tax breaks, at the White House Monday. (AP) Related Links Full Coverage: The President's Budget White House Economist Answers Your Questions

By Eric Pianin and John M. Berry
Washington Post Staff Writer
Tuesday, February 2, 1999; Page A5

By offering what many economists say is a fiscally sound and prudent new budget document, President Clinton yesterday may have gained an important edge in challenging GOP demands for a huge across-the-board tax cut.

Clinton has couched his plan as a way for the nation to responsibly address a series of long-term challenges, such as shoring up Social Security and Medicare, improving the nation's defense and schools, while at the same time increasing the nation's savings to enhance future economic growth.

The White House hopes its proposal will make it far more difficult for congressional Republicans to defend a costly tax cut that, according to many polls, most Americans don't favor.

For both sides, the biggest budget battle this year will be fought over how to carve up the enormous surpluses now anticipated after years of federal deficits.

Clinton's fiscal 2000 budget, as expected, offered a broad array of domestic and defense spending initiatives and targeted tax credits. Nevertheless, federal government spending would grow only 2.2 percent in the fiscal year that begins Oct. 1 – about the same rate as inflation.

The budget would stay within the tight spending caps imposed under the 1997 balanced-budget agreement, unless the White House and the Republicans were to agree to lift them to accommodate their competing agendas. Moreover, Clinton would hoard two-thirds of the whopping $4.4 trillion of surpluses the White House anticipates in the next 15 years to bolster Social Security and Medicare.

"Clinton is holding the high ground right now," said Robert D. Reischauer, a former director of the Congressional Budget Office. "If he hangs tough, he's going to be standing tall come October."

While House and Senate GOP leaders have proposed using as much as a third of the surplus for tax relief, Clinton wants to use those funds to create new Universal Savings Accounts to supplement the retirement income of average Americans and to underwrite the long-term costs of beefing up the military and improving the nation's schools.

A critical byproduct of Clinton's strategy would be to dramatically reduce the $3.7 trillion national debt, a goal long advocated by conservative Republicans. If Clinton's plan were enacted, within 15 years the ratio of the publicly held national debt to the size of the economy would drop to its lowest level since 1917.

Federal Reserve Board Chairman Alan Greenspan last week backed Clinton's call for a large portion of the surplus to be used to strengthen Social Security by paying down the national debt. However, he also cautioned Congress in testimony not to count on projected government budget surpluses alone to ensure that Social Security does not run out of money when the Baby Boomers retire in the next century. Greenspan suggested that the two parties still would have to cut benefits or raise taxes to insure the retirement system's future.

"If we manage the surplus right, we can uphold our responsibility to future generations," Clinton said yesterday in sending his budget to Capitol Hill. "We can do so by dedicating the lion's share of the surplus to saving Social Security and Medicare, and paying down the national debt. We can, and because we can, we must do it now."

"We have a rare opportunity that comes along once in a blue moon to any group of Americans," he added.

House and Senate GOP budget leaders replied that while they agreed with Clinton that 62 percent of the surplus should be set aside "to fix Social Security," they were appalled that the president would use the rest for more programs. Instead, they said, the money should be returned to taxpayers in the form of an across-the-board tax cut of 10 to 15 percent or more in the coming years.

"Cutting taxes is really a moral issue," said House Budget Committee Chairman John R. Kasich (R-Ohio). "We're not going to blow this opportunity by spending it on more government."

"We're not going to have another quarter-trillion dollars in new spending," Kasich added. "It's not going to happen."

Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) said he believed that paying down the debt might be an attractive idea, but the surplus "won't be saved" because the temptation to spend it is too great. The only question is whether to spend it on "more government" or on tax cuts.

While the Republicans warn that Clinton's new $1.8 trillion budget will get a cold reception on Capitol Hill, the plan nonetheless is based on economic projections that analysts said are reasonable – perhaps even conservative.

Administration economists expect economic growth to be a modest 2 percent for the next three years, a pace only half that of the 1996-98 period. Consistent with growth that slow, unemployment gradually rises to 5.3 percent from December's 4.3 percent rate. And consumer price inflation, which has been held down partly by temporary factors such as falling oil prices, is predicted to rise to 2.3 percent from last year's 1.6 percent rate and remain at the higher level indefinitely.

Maury N. Harris, chief economist at PaineWebber in New York, said he wouldn't quarrel with the administration's inflation forecast, but added, "They may be low on growth. They have a tendency to understate the gross domestic product because they understate productivity growth. I think we are in a period of faster technological change" that will generate greater productivity gains.

Beyond three years, the administration projects that the economy will grow at a rate pf about 2.3 percent annually.

With the budget already solidly in surplus, such modest growth is more than enough to produce ever greater surpluses in coming years, under Clinton's plan. In fact, the surpluses would increase each year despite his proposed increases in defense spending and other selected domestic programs.

One reason for this exceptionally favorable outlook is the effect of paying down the debt. As it diminishes, so does the government's annual interest bill.

With last year's $70 billion surplus, the first since 1969, the process of debt repayment began and will be continued with this year's $79.3 billion estimated surplus. Net interest payments peaked at $244 billion in fiscal 1997, fell very slightly to $243.5 billion last year and are expected to dip to $227.2 billion this year. Five years from now, in 2004, the budget shows them down $173 billion.

That reduction in interest payments would swell the surplus over the next five years by about $165 billion, a figure that would mount rapidly after that.

Greenspan argues that paying down the debt would add directly to the level of national saving, lower interest rates and make funds available for productive investments that would enhance future economic growth.

In addition, if the debt is reduced significantly, the government could resume borrowing to meet its future obligations if need be without having a negative effect on the economy, he said.

The Fed chairman urged Congress not to cut taxes or increase spending.

If politics forced it to do one or the other, then a tax cut would be preferable to more spending, he said.

Last year, congressional Republicans were divided on the tax issue and the House passed a plan to use part of the surplus to finance a major tax cut. The plan died in the Senate – in part because of Clinton's demand that Social Security be addressed before using future surpluses for tax cuts or spending increases. This year, however, the two chambers are more in sync and are likely to agree to a budget plan of their own providing for a major tax cut, despite an almost certain veto from Clinton.

But because so many major issues will be in play – including Social Security reform and a drive by both parties to boost spending for defense and education – a tax cut could become a large bargaining chip in any final budget and spending agreement this fall.

Yesterday, Treasury Secretary Robert E. Rubin declined to rule out a tax cut this year but stressed that saving Social Security and creating the new retirement accounts would be "a far better use of the surplus than consuming it with a tax cut."

Staff writer Guy Gugliotta contributed to this report.