Clinton Draws the Line At $500 Billion in Cuts

LATE last week as the House-Senate budget conference began, Sen. John Breaux (D) of Louisiana tried to soften the target, suggesting that $500 billion in deficit cuts over the next five years was no "magic number." He offered $400 billion instead.

But in political circles and among business economists, $500 billion has indeed become something close to a magic number. It has become the single outcome that President Clinton needs the budget reconciliation under negotiation now in Congress to produce - a bottom-line five-year deficit cut that rounds off to $500 billion.

Whether the package can credibly achieve the $500-billion figure or not, it is likely to govern what Ross Perot says about the bill, how Wall Street bond traders act on it, and whether American citizens put confidence in it.

"It's a test of seriousness about the deficit," says Democratic consultant Ted Van Dyk. Mr. Clinton "cannot be perceived as yielding on the central premise" of his economic plan.

It is also a test of whether Democrats can end gridlock, since Republicans have generally opted to oppose the plan.

The $500-billion benchmark has been established by Clinton himself. He said in February he would undertake the largest deficit cut in history, which would mean something above about $480 billion. He has since reiterated that goal.

The Wall Street financial markets, where interest rates are largely established, have already discounted rates on the likelihood of reaching the target.

"One of the reasons the Treasury [bond markets] have done well in recent months is that people have concluded the administration is serious about cutting the deficit," says Marilyn Schaja, a money-market economist at the securities firm Donaldson, Lufkin, & Jenrette.

How close does the reconciled budget have to come to the $500 billion figure? Anything above $450 billion in deficit reduction "will be fine," says Ms. Schaja. "It will still be a high deficit," she says, but it will be decelerating as a percentage of the gross domestic product.

But Mr. Van Dyk says he believes that even $480 billion would be too low, too much slippage in the eyes of the public and opinion leaders.

The $400 billion-cut suggested by Senator Breaux would raise interest rates, since the markets have assumed a $500 billion target, says a moderate Democratic analyst. It would also feed the public cynicism over politics. The analyst notes: "It would signal a concession to gridlock."

The president also needs the budget package to pass. If it fails in either chamber of Congress, Schaja predicts that interest on long-yield bonds could rise as much as 1 percentage point.

The symbolism of failing to produce the deficit cut could also have a practical political impact on Clinton. "If he stumbles in this, health-care reform will be very, very problematic," says Democratic consultant and Carter White House veteran Mark Siegel.

The House-Senate conference, which is likely to last a little more than two weeks, also is a critical gate to pass for the 1994 budget, which contains Clinton's five-year economic plan.

The broad outlines of the plan passed months ago in the budget resolution. But the sticky details of tax hikes and spending cuts in entitlement programs are in the budget reconciliation bill. Different versions passed in the House and Senate by thin margins. The challenge now is for leaders to find a compromise that can pass both chambers.

The hardest single issue is the energy tax. The Senate version raised less money with a narrower tax than the House version. If the conferees back away from a broad energy tax, as many seemed to last week, they will have to find another way to cut tens of billions from the deficit.

Once a reconciliation bill is signed, the appropriations committees set discretionary spending under the broad limits set by the budget resolution.

Then Clinton needs the plan to work. "What he needs more than anything is that deficits are lower by the next election," says Joel Prakken, a business economist and vice-president of the business-forecasting firm L.H. Meyer & Associates in St. Louis.

If Clinton raises taxes and does not get visible deficit results, as happened after the 1990 budget deal, "I think he's in trouble," Mr. Prakken says.

Another important outcome for Clinton, both politically and economically, is that the taxes are balanced with significant spending cuts. The White House says its own proposals are in rough balance - $1 of spending cuts for every dollar of tax increases.

Even sympathetic analysts are prone to agree that Clinton understates the taxes in the mix. Most market and business economists would prefer to see more cuts and fewer taxes in the plan. But most also see the benefit of deficit cutting outweighing the drag of taxes as long as they do not slip noticeably beyond the mix in the Clinton plan.