As economy improves, one headache yields to another: how to cut the deficit

February 07, 1993|By Gilbert A. Lewthwaite and Karen Hosler | Gilbert A. Lewthwaite and Karen Hosler,Washington Bureau

WASHINGTON -- The recent flurry of positive economic news is hindering as much as helping President Clinton draft his economic plan.

While reducing the need for a popular job-creating spending program, the positive reports focus immediate attention on reducing the worsening federal budget deficit. And that's where the really hard choices lie.

"There's no question it faces him with more difficult decisions," said Donald Ratajczak of the Georgia State University's Economic Forecasting Center. "His feeling was he was going to take on these problems [of increasing taxes and cutting spending], but he couldn't take them on until he got reasonable economic growth. . . . Now he has got decent economic growth."

Lawrence H. Meyer, a professor of economics at Washington University in St. Louis who ran some of the Clinton proposals through his computer for the campaign last year, said: "They had a very articulated, detailed program, which they now have to adjust and carve into it painful choices that were not discussed during the campaign."

Mr. Clinton has until his speech to Congress on Feb. 17 to prescribe the "sacrifices" he expects voters to make. As the deadline for decisions approaches, interest rates abroad and unemployment at home are down, and U.S. productivity and stock prices are up.

All this has perked up consumer confidence, and Mr. Clinton is busy preparing a hard-sell campaign to convince voters that the approaching good times must be tempered by tough measures to lower the deficit.

Mr. Clinton's choices center on tax increases and program cuts that are likely to come under almost instant attack by special interest groups, including the elderly, farmers and truckers, to name a few.

Among the probable proposals: a consumption tax on energy, alcohol and tobacco; a 36 percent tax bracket for those earning over $200,000; increased taxes on wealthy Social Security recipients; and $10 billion in defense cuts.

No easy cuts

David Wyss, an economist with DRI-McGraw-Hill, the Boston consultancy that has been asked by the administration to crunch the numbers on some of its major proposals, said: "They are coming into touch with reality. They are realizing there aren't any easy cuts. Everything that is being spent now has a defender."

Those defenders are already making themselves heard. Even before Mr. Clinton has announced a single decision, campaigns are under way or being prepared by those likely to be adversely affected.

Example: The American Petroleum Institute expresses its support for deficit reduction but warns that a broad-based energy tax "would impose significant, harmful and inequitable costs on the U.S. economy just as it is beginning to recover."

Other industries have joined in, forming just one of the formidable political-industrial phalanxes Mr. Clinton will have to confront.

Another coalition has been formed to oppose taxes on the health benefit premiums of 150 million Americans. This coalition includes the AFL-CIO, the Council for Affordable Health Insurance, the Employers Council on Flexible Compensation, the Self-Insurance Institute of America and the Society of Professional Benefit Administrators. The Coalition to Preserve Health Benefits will hold its first news conference Tuesday to urge Mr. Clinton and Congress not to propose the taxing of premiums as income.

Farmers are leery of having their subsidies cut further. Michael Dunn, vice president for government affairs of the National Farmers Union, testified to Congress last week that of the 12 top entitlement programs, farm subsidies were 12th in cost and were the only program to register a decline in cost between 1985 to 1991.

"We certainly feel the agricultural sector has done its fair share in budget reductions," said Mr. Dunn, who delivered a copy of his testimony to Agriculture Secretary Mike Espy on Friday and sent another to Leon E. Panetta, Mr. Clinton's budget director.

Equally energized is the senior citizen lobby, up in arms about the prospect of having its benefits frozen or its taxes increased. Leaders of the American Association of Retired Persons were told bluntly last week by Rep. Dan Rostenkowski, chairman of the tax-writing House Ways and Means Committee, that they were no longer "a sacred cow." Mr. Rostenkowski said that taking Social Security off the table would lead to "an avalanche of exclusions that will leave nothing but budgetary crumbs on the table."

To counter what is certain to be the clamor of opposition once Mr. Clinton identifies specific spending cuts and tax increases, the White House has a strategy to "sell" its program as bitter but necessary medicine.

A 'war room'

A so-called "war room" has been established in the OlExecutive Office Building, adjacent to the White House, to handle the challenge. This is based on a similar command center set up during the Clinton campaign to respond rapidly to any accusations made by President George Bush or to quickly douse any political brush fires.

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