May 4, 1997 in Nation/World

Budget Deal Could Fall Off Balance Agreement Based On Optimism

Steven Thomma And R.A. Zaldivar Knight-Ridder
 

The historic agreement by President Clinton and Republican congressional leaders to balance the federal budget is just the first step in long and difficult passage.

Getting to the day when the budget is actually balanced, with the economy generating more jobs, bigger paychecks and cheaper loans for homes, cars and college, is going to take a lot more work and perhaps a little luck.

Clinton and congressional leaders first must get the budget plan they announced on Friday past the House and Senate.

Then, in the months ahead, they must work out the details of thousands of tax and spend decisions in at least 14 major pieces of legislation, each of which must pass the House and Senate and win Clinton’s signature.

And even if they achieve all that - and they appear more able and willing than at any time in years - they face great risks.

For one, the entire agreement rests on the optimistic assumption that the economy will continue at its break-neck pace, boosting tax collections, until the budget is balanced in 2002. That would be the longest economic expansion since World War II. A recession would plummet the government back into deficits.

For another, the deal fails to address the budget-busting problem of ballooning entitlement spending when baby boomers start retiring in 2010.

Still, private analysts were positive, predicting the plan would boost the economy by lowering interest rates.

And the agreement marked an extraordinary turn in what has been an angry and confrontational capital. President Clinton and congressional Republicans were in remarkable harmony as they sought to sell the deal Saturday.

“This balanced budget plan is in balance with our values. It will help to prepare our people for a new century,” Clinton said in his weekly radio address. “I urge members of Congress in both parties to pass it.”

Speaking to reporters in the Oval Office, Clinton downplayed the agreement’s reliance on a windfall of tax revenues from the booming economy. He said it calls for the government to use just 10 percent of the $200 billion to $225 billion windfall forecast for the next five years.

“So, if they’re wrong, even quite a bit wrong, this budget will still balance in 2002,” Clinton said.

In the Republican radio response, Sen. Connie Mack, R-Fla., said: “Under this agreement, American families and businesses will keep more of what they earn. Washington will control less and you will control more.”

But even as negotiators celebrated, they warned that much work remains.

“We still are at the 50-yard line. We still have a long way to go to push it over the goal line,” said Rep. David Bonior, D-Mich., the Democratic whip in the House.

One of the biggest challenges will be agreeing on the shape and sizes of an array of tax cuts. While the White House and congressional leaders agreed on the broad goal of $135 billion in cuts, they still face long and likely contentious fights over how to divvy up the spoils.

“The important details are yet to be determined,” said Rep. Charles Rangel, D-N.Y., the senior Democrat on the tax-writing Ways and Means Committee.

Negotiators agreed there would be cuts for education, for families with children, for investors, for people saving for retirement, and for people inheriting estates. But, except for an apparent agreement to allocate $35 billion for the education tax breaks, they left the details for the House Ways and Means Committee and Senate Finance Committee to work out.

Take the promised capital gains tax cut for investors.

Republicans want to slash the tax rate in half on profits from investments like stocks. The proposal would total $33 billion over five years, according to the Center on Budget and Policy Priorities.

But Clinton proposes a far more modest $1.4 billion cut, targeted to people who sell their homes.

And, while negotiators agreed that there should be a $500 per child tax credit, the president and the Republicans have far different ideas who should get it.

Clinton would give it to families that make less than $60,000 a year, then gradually reduce the credit for those with incomes up to $75,000, and then cut it off completely. His plan would cost $46 billion over five years.

Republicans are more generous. They want to give the credit to families with incomes up to $110,000, gradually reduce it for those with incomes up to $150,000, and then cut it off. Their proposal would total $109 billion.

Also, the two sides agreed to include tax cuts or credits to help families finance college education. But Republicans are less than enthusiastic about the president’s proposal of both a $1,500 tax credit for the first two years of college and a $10,000 deduction for other tuition expenses, a plan that would cost $36 billion over five years.

The tax cuts would be offset in part by $50 billion in tax increases. Both sides agreed that $30 billion of that would come from a relatively painless extension of an airline ticket tax that was to expire this year. But Congress still must decide who will pay the remaining $20 billion.

A strong economy is what made a relatively painless budget deal possible. But if growth stalls or the economy shrinks, chances of erasing the deficit by 2002 would probably disappear.

And the cost of retirement programs like Social Security and Medicare will soar after the baby boomers begin retiring around 2010. The budget deal makes little effort to address that problem.

“There’s no real long-term entitlement reform, which means the deficit will just start rising again in the next decade,” said economist Larry Chimmerine of the Economic Strategy Institute, a Washington think tank.

If the economy falters, much of the additional $225 billion in tax collections that the Congressional Budget Office is projecting over five years could vanish. That would have consequences for people and programs.

For example, it could mean sharper increases in the Medicare monthly premium for doctor visits, now $42.50.


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