The Pay As You Go Budget: Dead At Five Months?

Pay-as-you-go may be gone with the wind.

One of the few innovations in last year's budget deal was a scheme to impose some discipline on federal spending. But now, the concept is getting its sternest test as Congress takes up popular spending for veterans as well as the costs of waging war and winning the peace in the Persian Gulf. If lawmakers and the Administration flinch, the deal's promise of $500 billion in deficit reduction could evaporate.

The key to the deal was a device known in budgetspeak as pay-as-you-go. It requires that any new spending be offset by savings in related programs or by tax hikes. That was supposed to control spending for five years. But now, budget specialists worry it may not last even five months.

The original deal divides discretionary spending into three categories: defense, foreign aid, and domestic outlays. Within each, a dollar of new spending is supposed to be offset by a dollar's worth of cuts in other programs: Increase aid to Israel, pay for it by cutting aid to other nations.

LOOPHOLES. A fourth category includes all so-called entitlements--programs such as farm subsidies, medicare, and many veterans' programs. These costs can grow as more beneficiaries automatically become eligible. But here, too, if Congress increases benefits under one program, it's supposed to slash other outlays by an equal amount or raise taxes. That way, higher benefits for vets of Operation Desert Storm would mean smaller payments to farmers or retirees. Even the most cynical budgeteers hoped that the agreement would work. It might not reduce the deficit, but at least it would keep spending from galloping further out of control.

But the plan is shot full of loopholes. Spending for the war is exempt from the caps. So is the burgeoning cost of the savings and loan bailout. And the President can exempt any other programs if he declares an "emergency" that calls for higher spending.

To hear Congress tell it, the world is full of such emergencies. Senate Majority Leader George Mitchell (D-Me.) wants Bush to declare one so that recession-battered states can have $84 million more for the unemployment insurance program. Representative Vic Fazio (D-Calif.) wants $30 million to help drought-stricken farmers. Then there are the emergency tax breaks for vets--expanded use of individual retirement accounts, low-cost mortgages subsidized by tax-exempt bonds, and tax exemptions for military pay.

For a while, the Administration stood fast against congressional pressure to exempt all this spending from budget restrictions. But now, it too has headed down the fiscal low road. Its own budget request to pay for the war included some shady bookkeeping. For example, the White House asked for enough money to buy 500 more Patriot missiles at a cost of $324 million, although fewer than 200 were used in the war.

Pentagon officials won't stop there. Already, they're looking for ways to stall the big troop reductions that were a cornerstone of last year's budget agreement. Such a delay could add as much as $30 billion to next year's Pentagon budget, wiping out virtually all of the fiscal package's spending cuts. So far, Budget Director Richard G. Darman has held off the generals. But there are few politicians willing to buck the Pentagon in the aftermath of its Persian Gulf victory.

FALSE PREACHING. To make matters worse, the White House is wavering on some requests for foreign aid. At first, it resisted efforts to exempt aid to Israel from the spending caps. But, under great pressure to reward Israel for its restraint during the war, the White House has included $650 million in military aid as part of its "emergency" Desert Storm request. That's just a downpayment. Israel wants $10 billion more in loan guarantees to build housing for Soviet immigrants. And no one will be surprised if aid to Egypt and Turkey blossoms.

Exempting gulf-related foreign aid from budget rules could break the dam. "If the international spending cap is blown," says one top congressional budget aide, "you're not going to be able to hold off the veterans. That would really put the budget agreement in jeopardy."

The new game everyone is playing is called "spend it, but don't count it." Military spending should be on-budget, unless there's a war. Federal deposit insurance should be on-budget, unless banks actually fold. Count the costs of unemployment insurance, unless there is a recession. In other words, the only time policymakers pay attention to spending is when they don't do much of it. Otherwise, it's an emergency that permits the White House and Capitol Hill to preach restraint and go on spending.

That's the kind of thinking that got the nation into its budget mess in the first place. The deficit this year will top $300 billion. Interest on the national debt will hit a cool $200 billion. Veterans' benefits, bank bailouts, aid to our allies in the Mideast--these new spending priorities may be worthy ones. But the Hill and the White House took a big step toward fiscal responsibility last year when they agreed to pay for future spending. They ought to stick to the deal.


VETERANS' BENEFITS Well over 100 bills have been in-

troduced in Congress, all intended to provide tax and oth-

er benefits to returning vets. The House has

already approved four bills that will cost $29

million in fiscal 1992. More are sure to follow

THE GULF WAR Foreign contributions should

pick up much of the cost, but the U.S. could

well kick in $10 billion to $15 billion

THE BANK BAILOUT Not only will the

government have to borrow more than $100

billion this year to bail out S&Ls, but there also are

dark hints it will have to come up with as much as $30

billion to bail out commercial banks

THE RECESSION Leading Senate Democrats have asked

the White House to declare a budget "emergency" and ex-

empt from spending caps $84 million to help states run

their unemployment insurance programs