Gramm-Rudman Grips US Budget

$16 BILLION SEQUESTERED

THE United States budget will go on ``automatic pilot'' today. With Congress unable to complete the fiscal year 1990 budget within its deadline, the director of the Office of Management and Budget (OMB) will issue a ``sequestration'' order, in effect placing $8.1 billion from the defense budget and $8.1 billion from non-defense programs into a government escrow account. The sequestration order kicks in automatically under the Gramm-Rudman deficit reduction act.

The funds are being sequestered because Congress delayed passing a budget while debating for weeks whether to lower the maximum tax on capital gains. In the end, the Democratic leadership, through parliamentary maneuvering, garnered enough votes to keep the provision out of the Senate's version of the budget.

However, Republicans are vowing to pass some form of capital gains provision before the end of the year. Republicans now expect to tack the capital gains provision on either a bill which will raise the debt ceiling or the continuing resolution, which will fund the US government until the budget is passed.

Placing the amendment on the debt ceiling bill would create ``a real game of blink,'' predicted Sen. Warren Rudman (R) of New Hampshire. Senator Rudman envisions the government reaching the debt ceiling by the end of the month - at the same time as Social Security checks are due to go out.

It is still unclear what form a capital gains provision will take, should one be eventually passed.

``We will get at the minimum the indexing of the cost basis of capital gains if not some sort of rate reduction,'' predicts Rep. Bill Archer (R) of Texas, one of the co-authors of the amendment to reduce taxes. Rudman, who sits on the Senate Budget Committee, predicts Congress will make the cuts permanent, indexed against inflation and graduated depending on how long investors hold a capital investment.

The next battleground for capital gains will be the conference between the House Ways and Means Committee and the Senate Finance Committee, since the capital gains provision has already passed the House version of the budget. This conference will also have to sort out catastrophic health care - which was in part repealed - and child care.

There are still other controversial parts of the budget which will take time to resolve. For example, there are differences between the House and Senate on the savings that can be obtained from taking the Post Office off the federal budget. Rep. Leon Panetta (D) of California, chairman of the House Budget Committee, predicts the process could take about 30 days.

However, this may be optimistic. For example, late on Friday there were rumors that the Senate had agreed to strip most of the controversial elements, including its addition of Individual Retirement Accounts, from its budget bill if the House removed the capital gains provision. However, it was not clear that the house leadership would accept this. As Rep. Archer noted in an interview, ``It is simple to say we are going to go with a stripped-down bill until you say what pieces are going to be in a stripped-down bill.''

Meanwhile, the government will fund itself by means of a continuing resolution. This will reduce the pressure for resolution of the budget situation since OMB can apportion funds on a month-to-month basis as agencies need them. However, as Congressman Panetta noted in a press briefing on Friday, ``sequestration will have a serious impact if it continues through the entire year.''

For example, Panetta estimates that $1 billion would come out of the education budget; the Federal Aviation Administration would have to cut workers; spending for drug enforcement would fall below the 1989 levels, and housing programs would take a significant reduction in spending.

The last time the automatic sequestration portion of the Gramm-Rudman bill went into effect was November 1987. It lasted for about two months - culminating with the budget summit between President Reagan and congressional leaders. It had some impact on student loans and medicare.

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