WASHINGTON -- Budget director Richard G. Darman signaled administration willingness yesterday to renegotiate with Congress the 1990 budget agreement that prevents the so-called "peace dividend" from being used to counter the recession, but attached tough conditions to any change in the pact.
The agreement caps defense, domestic and international spending, and prohibits the transfer of funding from one to another of the three categories.
Democrats in Congress want to tear down the walls between the categories to allow defense savings to be used for an economic growth package this year.
President Bush, in his State of the Union message, said his recovery program did not break the budget agreement. He earmarked $50 billion in defense savings over the next five years for deficit reduction.
Specifically referring to the spending caps, he said: "There are those in Congress who would ease that discipline now. But I cannot let them do it -- and I won't."
Mr. Darman, at a breakfast with reporters, said the administration's first choice remained to work within the 1990 agreement, but, if Congress insisted on tearing down the walls between the spending categories, there would be a renegotiation.
"There are a whole lot of things we would want, and the most important general characteristic is that the system we end up with has to be tougher, not weaker, than the present one," he said.
The administration's major negotiating positions include:
* Extending the individual caps on defense, domestic and international spending through fiscal 1997.
* Capping growth of entitlement spending, including the limit on annual growth of Medicaid proposed in Mr. Bush's health plan. Social Security would be excluded.
* Limiting growth of federal subsidies to such credit and insurance programs as small-business and farmers home loans, and federal deposit insurance.
Under the 1990 agreement, the individual caps on discretionary spending expire at the end of fiscal 1993. After that, all the funds, while still capped overall, will go into one spending pot, and Congress will be able to allocate among the three sectors at its discretion.
Effectively, Mr. Darman, was offering to renegotiate capped spending levels for fiscal 1993, raising domestic and lowering defense spending for a single year. This would give Congress a one-time transfer of the so-called "peace dividend" to spend on a recovery program. From fiscal 1994 through fiscal 1997, the caps would remain, and the funds would again be kept separate.
The caps on entitlement programs and federal subsidies are part of the administration's overall effort to reduce the growth of federal spending.
Mr. Darman described his proposal as "a little tighter, a little neater" than the 1990 agreement.
The Democrats are unlikely to accept Mr. Darman's proposal. The central thrust of current Democratic strategy is to pass a middle-class tax cut, probably confronting Mr. Bush with an unpopular veto decision, and to put an amended agreement on his Oval Office desk. The House Ways and Means Committee will begin considering the shape of economy-boosting tax reforms next week.
Sen. Paul S. Sarbanes, D-Md., chairman of the Joint Economic Committee and co-sponsor of legislation to tear down the budget agreement walls and use defense savings for both economic growth and deficit reduction, rejected the notion of extending the individual caps.
He said: "The whole problem with these caps is you are freezing your priorities in a fast-changing world.
"The reason the issue is coming up right now is that the international environment has changed very substantially, and figures you were committed to in defense no longer make sense in the current environment.
"You can't make intelligent decisions [under individual spending caps]. . . . That's the whole problem right now. Do you think decisions should be on automatic pilot?
"We have tremendous opportunities available to us, if we are wise and prudent in how we use them, with this collapse of the Soviet Union and the end of the Cold War."