Talking Turkey On The Budget

The Bosnians and the Serbs have done it. So have the Israelis and Palestinians. Now, finally, White House and congressional budgeteers are about to put aside their personal invective and sit to down to work out a deal of their own. Soon after Thanksgiving, they'll begin talks aimed at slashing the deficit by 2002--and dramatically downsizing the federal government.

Certainly, broad political and philosophical differences still stand in the way of a settlement. "This job is not done," says House Speaker Newt Gingrich (R-Ga.), "We've just taken a couple of steps down the road." But both sides took a first stride on Nov. 19. In the face of voter fury at the six-day government shutdown, Republicans backed away from their no-compromise position. And President Clinton accepted the GOP goal of a seven-year balanced budget. The deal was vaporous, but it reopened the government and set the stage for serious negotiations. "Sooner or later, they had to stop the food fight," says Martha Phillips, executive director of the Concord Coalition, a balanced-budget advocacy group.

To reach a mega-agreement by Christmas, both Clinton and Capitol Hill will have to swallow hard. The GOP will have to scale back its cherished tax cuts and cough up more dollars for some of Clinton's priorities, such as education and environmental protection. The President, for his part, already has ceded much of the battleground, having proposed a middle-class tax cut, backed efforts to slow Medicare growth, and endorsed welfare reform. Now, he will have to accept even greater Medicare savings as well as the seven-year timetable. "We all want it our way," says Representative Barbara B. Kennelly (D-Conn.), "What we have to understand is it can't be all our way."

Corporate executives, who had been fuming at the display of petulance on the Potomac, are cautiously optimistic that Washington will finally cut the deficit. That, they hope, will reduce interest rates, spur investment, and kick the economy into overdrive. "American companies will think this is a good first step," says Daniel J. Gallery, executive vice-president of manufacturer Carts of Colorado Inc.

But any deal between Clinton, Gingrich, Senate Majority Leader Bob Dole, and House Budget Committee Chairman John R. Kasich (R-Ohio) still will have to make it through Congress. In the Senate, a dozen moderate Republicans hold the balance of power. In the House, it rests with 50 to 75 conservative Democrats, who already have proposed a seven-year balanced budget that calls for a modest hit on Medicare and no tax cuts at all.

These centrists will be a powerful spur for both Clinton and Hill GOP leaders to find a compromise. If that's not enough, the consequences of failure loom large. For now, financial markets seem confident that a deal can be struck. But Leonard Miller, CEO of Florida homebuilder Lennar Corp., warns that gridlock would push up interest rates and be a huge "negative" on the economy. Lawmakers would be sitting ducks. "This absolutely has to get done, or everybody's political fortunes are in deep trouble," says R. Bruce Josten, senior vice-president of the U.S. Chamber of Commerce.

FURTHER SHRINKAGE. Before any agreement is reached--probably around Christmas--lawmakers are in for a month of white-hot budget talks.

"The size of the tax cut will drive the whole deal," says one top White House aide. House Republicans first wanted to cut taxes by $350 billion over seven years. That has been scaled back to $245 billion. And business executives say they'd be willing to see an even smaller tax cut. Richard L. Thomas, chairman of First Chicago Corp., says he'd favor a further rollback of the tax package--"but only if we have some meaningful surgery on spending." Gingrich is hinting that the package indeed will shrink some more.

Clinton and Congress have both endorsed a $500-per-child tax cut. The President would go along with a capital-gains tax cut as well. But both may have to be trimmed back, and the capital-gains proposal may no longer be retroactive to last January. Republicans would also have to drop their attempt to slash a tax credit for the working poor. The White House says it might tighten up the fraud-ridden program, but that's it. In all, a tax cut could well be scaled back to $175 billion.

Medicare is where Clinton will have to show some flexibility. He has proposed saving $124 billion through 2002 by cutting payments to doctors and hospitals, while the GOP would shave the program's growth by more than $270 billion, in part by raising premiums on the elderly. For now, Clinton aides say he'll never support fee increases. One possible compromise: Premiums now are about 31% of the program costs, but they're scheduled to fall to 25%. Canceling that rollback would cut the deficit by an additional $50 billion.

Republicans, meanwhile, want to end the federal entitlement to Medicaid. The White House will accept some cuts to this health-care program for the poor, but it's demanding that Medicaid remain a national program. Lawmakers may keep the entitlement but cap future costs.

ASSUMED SAVINGS. Compromising on economic assumptions could reduce the need for deeper spending cuts by $200 billion or more through 2002. There are two big issues: The first is how fast the economy will grow during the next several years; the second is what to do about inflation adjustments for taxes and Social Security.

If the pols assume that the economy will grow a bit faster than Congress has figured, they could "save" up to $60 billion over seven years. Many Republicans, who see budget-cutting as a means to slash government programs, will resist the change, but some revision in the forecast is likely.

Fiddling with the inflation adjustment is trickier. Reducing cost-of-living increases and tax indexing by a mere 0.5% would narrow the deficit by more than $33 billion in 2002 alone. But that would mean trimming Social Security benefit hikes. And because personal exemptions and the standard deduction automatically increase with inflation, reducing the hike also would amount to a tax increase. Curbing indexing would wipe out 25% of the GOP's tax cut for 2002.

There's no easy way to get a balanced-budget deal by yearend. But budgeteers, normally a pessimistic lot, are confident that an accord can be reached. As with any long-term fiscal blueprint, actual balance may prove elusive for the drafters of the Grand Compromise of '95. But the budget now taking shape promises to get Washington closer to fiscal sanity than it has been for years.



Congress wants a $245 billion tax cut over seven years; Clinton backs a $100 billion version. Clinton will accept a reduction in capital-gains taxes, and Republicans will back off a plan to curb a tax credit for the working poor. Both sides favor a tax credit for children. Look for an overall cut of $175 billion.


Over seven years, Republicans would slow Medicare growth by $270 billion, mostly by raising premiums. Clinton would trim the program by $120 billion, but refuses to raise beneficiary costs. Expect some modest premium hikes and budget savings of $175 billion to $200 billion.


Except for farm programs, Congress has barely touched corporate-tax and -spending subsidies. Clinton will demand deeper cuts in tax breaks and direct payments to business. Best bet: More sales of the broadcast spectrum and a $40 billion cut in tax goodies for business.


Congress would end entitlements to welfare, food stamps, and Medicaid. Clinton wavers on welfare but opposes sending Medicaid and food stamps to the states. A final seven-year deal could preserve the federal role but cap spending. Total savings: $150 billion.

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