Budget Avoids Difficult Choices on What to Cut : New Spending Programs Described in Detail but Specifics Are Lacking on Where Ax Will Fall

The budget that President Bush delivered to Congress on Thursday accomplishes a bit of fiscal legerdemain: It lops billions of dollars from the federal deficit even as it avoids many of the difficult choices that the nation must confront in the years ahead.

In his $1.16-trillion budget and in his nationally televised speech to Congress, the President laid out in considerable detail where he would like to boost government spending to support his priorities of education, science, drug abuse, child care, environmental protection and the homeless.

But Bush, continuing to rely on his campaign slogan promising a “flexible freeze” on most spending programs, remained generally unclear about where he would find the savings necessary to pay for his new programs.

Growth ‘Not Preordained’

“We can afford to increase spending--by a modest amount but enough to invest in key priorities--and still cut the deficit by almost 40% in one year,” Bush told Congress. “But to do that, we must recognize that growth above inflation in federal programs is not preordained, that not all spending initiatives were designed to be immortal.”

As he promised frequently while campaigning for the presidency, Social Security benefits would not be affected. Bush agreed to keep government payments to the elderly and disabled rising with inflation.

Rather than embracing many of the unpopular spending cuts that former President Ronald Reagan advocated in his farewell budget last month, however, Bush singled out only a handful of programs for reductions.

Without saying precisely how, he proposed paring about $5 billion from Medicare spending increases and allowing the defense budget to grow only at the rate of inflation next year. He also said he would eliminate the cost-of-living adjustment for federal retirees for one year.

For the rest of the fiscal 1990 budget, Bush proposed his “flexible freeze”--a cap on overall spending at exactly the same level as the current year, without any allowance for inflation. Future negotiations with Congress would determine where Washington should extract savings from a host of domestic programs defended by hundreds of politically powerful interest groups.

“This is the ‘Alice in Wonderland’ year of budgeting through the looking glass,” said Carol Cox, head of the Committee on a Responsible Federal Budget, a citizens’ group. “I’m sure Congress will find many of the add-ons Bush offers very attractive. But I don’t think they will find the cuts necessary to pay for them any more appealing than the President does.”

Richard G. Darman, director of the White House Office of Management and Budget, defended Bush’s approach as more politically realistic than Reagan’s proposed wholesale eliminations of popular programs.

“It is meaningless for the Executive Branch to write down exactly what it proposes to cut under those headings. It doesn’t happen,” Darman told reporters during a briefing in advance of Bush’s speech.

“What we need to do is first agree on a cap,” Darman said, “and then we can have serious negotiations about what goes up and what goes down . . . . It’s totally unfair to suggest there isn’t an enormous amount of specificity in this program.”

In his speech, Bush promised those budget talks. “My team and I are ready to work with the Congress,” Bush promised, “to negotiate in good faith, to work day and night--if that’s what it takes--to meet the budget targets and to produce a budget on time.”

Approach Questioned

But even some Republican economists questioned whether Bush’s approach would accomplish that goal.

“If a larger share of the national output is to go to investment, assistance to the poor and education, and if the share going to defense is not to be reduced very much, what will get a smaller share?” asked Herbert Stein, chief White House economist under former President Richard M. Nixon. “Failure to come to grips with this question is at the heart of our budget problem and our national priorities problem.”

At the same time, Bush’s budget blueprint rests on a shaky foundation of optimistic economic assumptions and a questionable assertion that cutting capital gains taxes for the wealthy will generate higher revenues for the government.

Under Bush’s plan, the economy is expected to plow ahead at a brisk rate of more than 3% this year, even as interest rates fall sharply from their current levels.

Falling Interest Predicted

With four months of the current fiscal year already gone and rates on three-month Treasury bills now at 8.5%, Bush is nonetheless forecasting that interest rates will average 7.4% for the whole fiscal year. And, according to the White House scenario, rates will continue falling for several more years.

Darman defended the projections as credible. “If this program is enacted promptly,” he said, “we believe there would be a sharp decline in interest rates.”

Bush asserted that his capital gains proposal--cutting the maximum tax rate on long-term profits to 15% from the current 28% or 33%--would generate about $5 billion in additional revenues next year, another $5 billion the following year and lesser amounts in subsequent years.

In the short term, the Administration says, the capital gains tax cut would encourage more sales of investments. And in the longer term, it says, the cut would enhance economic growth.

But many economists dispute those contentions and the proposal already has encountered stiff opposition from key Democrats on Capitol Hill. House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) promised to oppose it vigorously.

“I’m not about to tell the wage earners in Chicago that they should pay a higher tax than stockbrokers,” Rostenkowski told the National Press Club only hours before Bush’s address to Congress.

Facing Congress and the Administration is the ticking time bomb of the Gramm-Rudman budget law, which sets a deficit target of $100 billion for the 1990 fiscal year, which begins Oct. 1. If the White House and Congress fail to agree by early next fall on a plan to come within $10 billion of that goal, the law would trigger automatic spending cuts that would hit defense and domestic spending programs equally hard.

Because lawmakers are required to follow the relatively optimistic White House economic projections, it is possible that Congress and the President could skirt the deficit dilemma this year. In contrast to the White House projection that the deficit will fall to $91 billion from an expected $163 billion this year, the Congressional Budget Office has projected that next year’s deficit would reach $120 billion, even if all the cuts Reagan had proposed were to be enacted.

The following year, however, the task will be even more difficult.

BUDGET HIGHLIGHTS

Key differences between Bush’s proposed budget for the 1990 fiscal year and the Reagan plan.

SPENDING

Program Outlay Change Effect Offshore leasing $+3.5 billion Curtail offshore oil lease sales off California and southern Florida, dramatically reducing anticipated revenues Defense -2.6 billion Freeze defense spending, with growth for inflation; Pentagon to propose specifics in 60 days Medicaid +1.7 billion Cancel Reagan’s proposals to force states to hold costs down; begin grants to combat infant mortality Drug abuse +236 million Increase spending for education and treatment programs Conservation +182 million Beef up land and water conservation fund Homeless +165 million Provide more housing and food for the homeless Nuclear weapons +86 million Clean up nuclear waste plants and modernize weapons plants Ground water +64 million Encourage better farming quality practices, protect ground water quality from fertilizer and pesticides Merit schools +30 million Reward superior schools with federal grants Acid rain +25 million Start program to help reduce sulfur dioxide emissions Magnet schools +12 million Provide grants to encourage the creation of magnet schools Head start +12 million Expand the program for disadvantaged preschoolers

REVENUES

Impact on Tax Revenue Effect Capital gains +$4.8 billion Reduce the maximum tax rate to 15% for profits on investments Research -387 million Make permanent the tax experimentation credit to encourage business innovation Child care -182 million Bolster tax credit assistance assistance for poor families Enterprise zones -150 million Provide tax breaks for businesses that locate in poor inner-city and rural areas Adoption -0.5 million Increase tax benefit for adopting handicapped children to $3,000 per child

SOURCE: Office of Management and Budget