Speed Bumps on Road to Budget Deal

When White House and congressional leaders resume their federal budget negotiations today they are bound to find some common ground. They have removed part of the gulf in the economic forecasts on which they base their spending and revenue projections.

But the budget impasse may drag on as negotiators continue to exchange barbs and voice frustrations.

"Anything can happen," one senior administration official said this weekend after a full week of renewed budget bargaining. "But there's a good chance this thing won't get resolved by the end of the year."

What may break the logjam is a new report from the Congressional Budget Office (CBO), which was expected to issue a much-awaited reassessment of the economy and the budget last night. The document comes just in time for top negotiators President Clinton and Treasury Secretary Robert Rubin - both just returned from separate overseas trips - to examine them before they sit down this morning with their GOP counterparts.

It was the CBO's earlier, more optimistic projections on which GOP budgeteers originally structured their federal spending plans. Budget watchers say the CBO revise - which at press time was still confidential - will reflect a more sober forecast of growth in the nation's gross domestic product.

Political analysts expect the new numbers will allow the GOP some room to compromise on its tax- and spending-cut proposals without appearing to give in to Democratic demands.

Democrats and Republicans say that political posturing aside, their parties are still very far apart on tax-cut proposals and how much to reduce the increases in federal outlays for Medicare and Medicaid.

If a budget deal can't be worked out by the Dec. 15 deadline, the continuing resolution - a temporary spending bill to keep the government operating - should be extended through the Christmas season, Senate Majority leader Bob Dole (R) of Kansas said on the South Carolina campaign trail this weekend.

"The difference between us and the GOP is that they have an accounting-centered approach, with specific numbers for specific years and we have a principled approach," says Lawrence Summers, deputy secretary of the US Treasury. "Our three absolute principles are helping working families, preserving health-care entitlements, and providing assistance for those unable to cope with the rising education costs."

According to US Treasury data, real incomes of the top 12 percent of income earners have doubled over the past decade, while real incomes for the bottom quintile have fallen by 20 percent. "The core of the budget debate is that we have to achieve budget reduction in a fair manner for an economy with increasing income disparities," Mr. Summers says.

Summers is most troubled by the GOP proposal to cut federal estate taxes. The move, he says, will cost Uncle Sam $27 billion in revenues over 10 years while lining the pockets of the richest 1 percent of taxpayers.

Senator Dole counters that the estate-tax cut will act as an economic stimulant. By giving relief to those who inherit small businesses and farms who cannot afford to pay the inheritance tax, their acquired enterprises will prosper and create jobs, rather than be liquidated.

White House opposition to the GOP's overall $245 billion in tax cuts - most of which, the administration says, will benefit top income earners - does not originate with the Clinton administration, contends Les Samuels, the Treasury's assistant secretary for tax policy.

Critical analysis of the distributional impact of taxes is "Treasury's traditional approach," he says. In terms of "tax benefits and burdens ... this is about as clear a case in right and wrong as I've encountered."

As for the GOP, "the rank and file feel no pressure to capitulate," says Rep. Rick Lazio (R) of New York, a member of the House Budget Committee. "If it were up to most of the Republican membership, they'd hold the line. Their two highest priorities are the capital-gains cut and the income-tax credit."

Summers contends the Administration will not back off. "We want to balance the budget ... but not at the expense of our principles. To accept an agreement that doesn't focus relief on middle-income and lower-income taxpayers, that doesn't provide for the education cost increases."

Of all the prickly issues that lie ahead, health-care provisions for the elderly and the poor are the most thorny.

"I'm not sure the White House wants a solution," says Brookings Institution economist Barry Bosworth. "Medicare is too good a political issue for them to give up." He sees "fairly high prospects that no budget deal will be reached and entitlements will continue to be funded in 1996 at the same levels they were in 1995" through continuing resolutions.

"The administration should push for a dumping of the tax cuts and use the revenue to scale back the impact of Medicare and Medicaid reductions - that's my read of what public opinion wants - but it's too rational to happen," says Mr. Bosworth.

"If the Democrats decide that it's to their advantage to seize the continuing resolution as the vehicle of choice to finance the government, they will likely use it to thwart the Republicans from claiming victory on the balanced budget," Mr. Lazio says.

To many Wall Street analysts, that's not only politically risky, it could be economically devastating.

"The Administration has to carefully weigh the implications of not reaching a budget agreement," says Kathleen Stephansen, senior economist at Donaldson, Lufkin & Jenrette, a New York-based financial firm. "On the one hand, Clinton's popularity ratings are high; on the other you have a market rally, which has fully embraced an agreement. Falling short of that, Wall Street could take a U-turn, with a massive sell-off and the bond market going south."

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