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Clinton's Fancy Budget Work Upstages Skeptical GOP

By Andrew Taylor, CQ Staff Writer

President Clinton's fiscal 1999 budget is both a bold agenda and a campaign document that relies heavily on creative accounting and some unlikely legislative luck. But its poll-tested appeal has Republicans scrambling to come up with an alternative.

Clinton, buoyed by steadily surging tax revenues, won a political coup by sending Congress not only the first balanced budget in three decades but also a seemingly pain-free plan to boost spending by as much as $114 billion over five years while running a $219 billion surplus.

"This budget marks the end of an era and the decades of deficits that have shackled our economy, paralyzed our politics and held our people back," Clinton said in a Feb. 2 White House ceremony. "We've done more than simply balance the budget, more than just line up numbers on a ledger. We restored the balance of values in our policy, restored the balance of confidence between government and the public."

Congressional Republicans blasted the $1.7 trillion Clinton budget -- with its spending increases -- as being built on a fragile house of cards: $66 billion over five years in tobacco-related revenues that are shaky at best, numerous tax increases that may not be enacted and proposed cuts in GOP-backed programs that the GOP-controlled Congress will reject. They also criticized the administration for trying to break through "caps" on appropriations that Clinton agreed to only six months ago.

"He's given us a budget proposal in which his offsets are not real," said House Appropriations Committee Chairman Robert L. Livingston, R-La. "He spends money that doesn't exist. He terminates programs that he knows won't possibly end. And he anticipates programs that are not in existence today and for which he's never sent us legislation. That combination makes for good smoke and mirrors, but it doesn't make for good budget planning."

Budgetary reality, however, is only part of the debate. Election year politics is also at play. Clinton and his GOP rivals find themselves waging their budget battles in a new post-deficit world that presents myriad opportunities for rewarding the voters. The White House has made it plain that it is spoiling for a fight that pits Clinton's vision for the size and shape of the federal government against Republicans' competing plans.

For Clinton, this means "investments" such as spending increases and tax breaks to boost federal assistance for child care, education, health care and many other programs, big and small. Each idea scored well in Democratic polls taken before Clinton announced his plans.

But Clinton's call for a more activist federal government runs head on into an unimpressed Republican congressional majority. "Last year, we convinced the president to make a commitment to balancing the budget, cut taxes and shrink the size of the federal government," said House Budget Committee Chairman John R. Kasich, R-Ohio. "I am amazed he gave us a budget today that reverses that commitment and increases the size and reach of government in people's lives. It looks to me like the era of big government is back."

Set against the backdrop of a $1.7 trillion budget, Clinton's plans appear much less ambitious. His spending initiatives would increase the budget by an average of only 1.2 percent a year over the next five years.

"These increases are really very, very small in comparison to the overall size of the budget; however, it's in both parties' interest to exaggerate their size," said former Congressional Budget Office Director Robert D. Reischauer, now a budget analyst at the Brookings Institution. "The president can't really come out and say these are really a drop in the bucket . . . and the Republicans can't frontally assault these proposals, because they are very popular with the American people, so their attack has to be that this is the return of the big government monster."

While attacking Clinton's plan and vowing to hold the line on spending, Republicans also seem to be on the defensive. Even solid conservatives acknowledge the popularity of allocating greater resources for child care, scientific research, education, expanded Medicare coverage and tax incentives for energy conservation.

"Child care, Medicare, hiring more teachers are all very wonderful and powerful objectives," said Sen. Gordon H. Smith, R-Ore. "Certainly, I support all of those things. . . . Having said that, this budget strikes me as very good politics but perhaps very poor math."

House and Senate Democrats, for their part, are united behind Clinton's agenda, which borrows heavily from their 1996 "Families First" campaign manifesto. They cannot hide their satisfaction at Republicans' discomfort.

"The Republicans . . . know Clinton put them behind the eight ball and basically said, 'You choose between child care and school kids and the tobacco industry.' And they don't like that," said Rep. Ken Bentsen, D-Texas.

Added a former congressional aide, now a GOP consultant: "It's got Republicans in a box. It really does. And they don't like it. It leaves it to Republicans to explain that, in fact, you cannot do what [Clinton] seeks to do."

Republicans are weighing how to respond to the popular Clinton agenda, aiming to put their stamp on issues such as child care, education and taxes. A common theme is to reduce the role of the federal government and give assistance directly to state and local governments or the public.

Republicans also vow that tight "caps" on discretionary spending, or the annual appropriations bills, will not be loosened. Many of them support another tax cut to follow last year's tax package (PL 105-34), such as easing the so-called marriage penalty under which some married couples pay more in income taxes than they would if they filed individually.

Republicans have yet to reach consensus and line up behind an agenda to counter Clinton's. Among their problems is a sizable faction -- led by Transportation and Infrastructure Committee Chairman Bud Shuster, R-Pa. -- that wants to increase spending on highways and mass transit above the levels set by last year's budget pact.

"We're going to have a pretty . . . tough internal fight," Kasich said. "But my view is at the end of the day the party will stick to its principles. But boy, if we break the budget agreement, that'd be a sad day in Mudville, wouldn't it?"

Reality Check

Regardless of which side has the upper hand politically, both have to abide by the rules of the budget process. For example, budget rules do not permit using new taxes or cuts in spending on mandatory programs such as Medicare to finance discretionary appropriations, as Clinton would like to do.

The same rules apply to Republican ambitions for an election-year tax cut. Under "pay as you go" budget rules, any cut in taxes must be "offset" by other revenue increases or cuts in mandatory programs. These rules apply whether there is a deficit or a surplus.

In short, the budget rules greatly limit the options of those who want to deviate significantly from last year's budget deal.

That could change, however, with another "spring surprise" like the $225 billion in extra tax revenues that the Congressional Budget Office (CBO) found a year ago, greasing the budget talks. What if CBO suddenly predicts a fiscal 1999 surplus of $50 billion? That might be too tempting for lawmakers to pass up.

"It's preordained that spending will go up because the budget is looser," said Allen Schick, professor of public policy at the University of Maryland. "We're going to spend more money because there's more money to spend."

The opposing view holds that even if CBO changes its estimates later in the spring and projects a surplus for fiscal 1999 (or even fiscal 1998), a combination of budget rules and politics would conspire to frustrate lawmakers with designs to "spend" part of it on tax cuts or new spending programs.

"Unless the [pay-as-you-go] rule is changed, it will be very difficult to pass a tax reduction bill this year," said House Ways and Means Committee Chairman Bill Archer, R-Texas.

And Clinton has seemingly trumped Republican designs for any surplus-driven tax cut by vowing to "save Social Security first." Clinton says he wants to convene a bipartisan effort next year to shore up Social Security.

House Speaker Newt Gingrich, R-Ga., told reporters Feb. 5: "I'm willing to stipulate: Let's keep that surplus and apply it as a reserve fund for Social Security." He said a tax cut could be achieved "by not having new bureaucracies."

Republicans are already cool to Clinton's spending initiatives. If he blocks a tax cut, it is difficult to imagine them giving him new spending.

"I wonder if this is a political budget that backs Republicans off of tax decreases and the Republicans then back Democrats off spending increases?" said Smith.

Unlike last year, when Clinton and Republicans were both eager to compromise to produce a historic balanced-budget pact that contained pieces of both their agendas, this year neither side has to have an agreement. Failure is an option.

"[The budget] will be balanced in three years regardless of what we do up here," said Senate Budget Committee Chairman Pete V. Domenici, R-N.M. "If we did nothing, it will be in balance."


Budget analysts' eyes glazed over as they tried to figure out how much new spending Clinton called for. To an unusual degree, several experts said, the budget was presented in a deliberately confusing way. "I have a couple of people who are the best budget analysts in all of Washington, D.C.," Domenici said. "And they tell me that the president has succeeded in confusing even them."

For example, the budget purports to create three new "investment funds": a Research Fund for America, an Environmental Resources Fund for America, and the Transportation Fund for America. But no such funds would be actually established; the Office of Management and Budget (OMB) acknowledges that they are "purely presentational" devices produced for the budget. Among its highlights:

  1. Vital statistics. Clinton's budget calls for $1.73 trillion in spending in fiscal 1999, up 3.9 percent from 1998. From fiscal 1999-2003, spending would grow at about 2.9 percent a year, rising to $1.95 trillion by 2003. The increased spending would be driven by Social Security, Medicare and Medicaid. Combined spending on the three programs would rise about 4.4 percent a year over the five years.

The projections of growing surpluses and continued low interest rates would allow the government to spend slightly less each year in payments on the national debt. Such payments would slip from $242 billion in fiscal 1999 to $221 billion in 2003.

  • Surpluses. For the first time since 1969, when the government ran a budget surplus of $3.2 billion, the government would produce a fiscal 1999 surplus of $10 billion. Such surpluses would rise to $90 billion in 2002 and $258 billion in 2008. Clinton's budget calculations assume that Congress will enact the initiatives presented in the budget.
  • CBO, which assumes no changes in current law, predicts lingering deficits through 2000, with a $14 billion surplus in 2001 and $69 billion in 2002. All told, CBO projects net surpluses of $132 billion over the next five years and $660 billion through 2008. The more optimistic OMB assumes surpluses of $219 billion over 1999-2003 and $1.1 trillion through 2008.

  • New spending. Discretionary appropriations have been "capped" since the 1990 budget agreement. Last year's budget law (PL 105-33) extended these caps through 2002. The caps can only be changed for technical reasons or by a change in the law. Tax increases or cuts in mandatory spending programs cannot be used to offset additional appropriations, though user fees and other "offsetting receipts" can be used to finance more of such discretionary spending.
  • But the Clinton plan seeks to get around the caps by using $56 billion in new taxes and other revenues over five years to pay for additional discretionary spending. Among the offsets that appropriators would have access to are: $25 billion in revenues from the tobacco settlement, $7.4 billion from extending superfund taxes, and $6 billion from new Federal Aviation Administration (FAA) user fees. For the four years covered by the caps (1999-2002), the administration proposes exceeding them by $39 billion. Then, in 2003, discretionary spending would rise by an additional $19 billion.

    The bulk of new spending would go to the Pentagon. Defense spending would rise from $265 billion in fiscal 1998 to $289 billion in 2003; domestic discretionary spending would rise from $269 billion to $287 billion over the same period.

    On the mandatory spending side, Clinton proposes outlay increases of $53 billion over 1999-2003, including: $6.6 billion in grants to states to subsidize child care; $5.1 billion in grants to help schools hire teachers to reduce class sizes in the early grades; and $2.4 billion to restore food stamp benefits for 730,000 legal immigrants who lost them under the 1996 welfare bill (PL 104-193). An additional $22 billion would flow to the states under the proposed tobacco settlement.

  • Revenues. Clinton proposes $129 billion in new revenues over five years. About half ($66 billion) would come from the proceeds of the wide-ranging tobacco settlement currently before Congress. But the tobacco settlement is in deep trouble and this money may not materialize.
  • The Clinton plan would provide $24.9 billion in tax cuts over five years, including: $5.1 billion to increase the child care tax credit; $3.6 billion to promote energy efficiency; and $5 billion to subsidize school construction bonds.

    These tax cuts would be offset by $23 billion that would be raised by closing 39 tax "loopholes." About half of this revenue would come from ideas that have been rejected before.

    Taken together, the tobacco money, tax loophole closings, a tariff increase and other taxes such as reinstatement of superfund levies ($7.4 billion) brings the total to $106.3 billion.

    Another $22.9 billion would be raised under proposals for new user fees, including $2.8 billion from meat and poultry inspection fees, $2 billion from audit fees levied on Medicare providers and $6 billion from FAA user fees that would replace the ticket tax.

  • $17 billion windfall. In an arcane bit of budgetary sleight of hand, the administration produces $17 billion in mandatory savings from veterans' benefits. The budget would reverse a decision by the Department of Veterans Affairs (VA) general counsel that changed agency policy to compensate veterans for all smoking-related illnesses, instead of only those caused by smoking during a veteran's term of service. The additional coverage would have cost the VA $736 million in 1999 and $17 billion over five years. This money has been built into the mandatory spending "baseline," so reversing the decision produces savings that could be used to offset other spending or tax cuts, even though no real money is involved.
  • Social Security. The budget proposes to "reserve" surpluses to "save Social Security first," but administration officials acknowledge that what they would do is use surpluses to pay down the national debt. Reducing the debt -- especially the portion held by the public -- would put downward pressure on interest rates and strengthen the government's overall financial health, making it less costly to issue new debt in the future to pay off the bonds in the Social Security trust funds.

    Some lawmakers said the administration was disingenuous in describing buying down the debt as protecting Social Security, but the move is politically shrewd. Republicans have backed off plans to use any surplus to finance tax cuts. "The president has done a remarkable thing: making paying down the debt sexy," said a senior Senate Democratic aide.

    Social Security will be part of the debate in another respect. Any surpluses in the overall "unified" government budget will occur because the Social Security system is running annual surpluses. These surpluses are estimated at $101 billion this year and will almost double over 10 years. They are deposited into a trust fund but immediately borrowed to finance government operations. Any attempt to spend the unified surplus will run into opposition from Democrats such as Sen. Ernest F. Hollings of South Carolina, who is seeking to segregate Social Security from the rest of the budget.

    Steady Slide

    Clinton unveiled the budget at a boisterous White House ceremony Feb. 2, in which he and the assembled Democratic faithful took pride in slaying the deficit, the once-intractable beast that consumed the early months of his presidency.

    In 1993, facing a deficit of more than $300 billion, Clinton and congressional Democrats pushed through a tax-heavy budget plan at great political cost. But it did succeed in bringing the deficit down and placing downward pressure on interest rates.

    Republicans can point to the 1996 welfare and farm bills (PL 104-193; PL 104-127) and cuts in appropriations as their contribution to the falling deficit.

    Not responsible for the declining deficit, at least in the short term, are last year's twin tax and spending bills (PL 105-34, PL 105-33) aiming to balance the budget by 2002. The 1997 pact traded long-term savings in entitlement programs for immediate tax cuts and new appropriations that are projected to add $21 billion to the fiscal 1998 deficit, while barely affecting the 1999 deficit.

    Negotiations or Gridlock?

    It was a year ago that Clinton officials, including OMB Director Franklin D. Raines, started secret meetings with Domenici that paved the way for the 1997 budget pact. This year, the timetable is slower.

    "I think they're not ready. . . . I don't think this will start for a while," Raines said after a Feb. 3 House Budget Committee hearing. "They will need to test out -- as they were doing today -- if there is a way for them to overcome the great popularity of these proposals. At the point where that doesn't work, then we'll sit down and talk about actually coming up with legislation."

    Kasich, despite his opposition to the Clinton plan, professes optimism: "We'll sit down behind some closed door and work it out," he said. But until Republicans can coalesce behind an alternative, the picture is decidedly unclear.

    Raines has privately told Democrats that he believes the White House has a strong hand and will obtain at least part of what it seeks. One scenario would be a reprise of 1996, when Republicans gave the White House about $7 billion in additional appropriations as a price for Clinton's signature. This is an election year, and Republicans, with more incumbents to protect, are planning to adjourn early.

    It is not clear, however, which of Clinton's proposals are most important to him. The White House is unwilling to publicly announce its top priorities. "You should have seen what we left on the cutting room floor," Raines quipped.

    © 1998 Congressional Quarterly Inc. All rights reserved.
    In CQ News This Week

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