$1.23-Trillion Budget Has No Major Changes

President Bush Monday proposed a $1.23-trillion fiscal 1991 budget that calls for holding a tight rein on federal spending but avoids sweeping changes in government priorities and contemplates only relatively modest tinkering with the vast array of national defense and domestic programs.

Unlike former President Ronald Reagan, whose policies resulted in enormous deficits and a major shift in resources from domestic programs to the Pentagon, Bush largely accepts the status quo in his first full-scale spending plan.

He would cut the budget deficit by about half, to $63.1 billion, by trimming a host of programs and relying on the continuing health of the national economy.

He forecasts a set of conditions that most economists regard as unlikely: robust economic growth to drive tax revenues up and declining interest rates to force the government’s borrowing costs down.

True to his frequently stated pledge, he would not raise general tax rates.

Bush wants to spend somewhat more on space exploration, scientific research, drug enforcement, education and the environment for the 1991 fiscal year, which will begin Oct. 1. He would restrain federal outlays on defense, Medicare, federal retirement and farmers.

White House Budget Director Richard G. Darman, invoking a character from the children’s television show “Sesame Street,” likens federal spending to the “Ultimate Cookie Monster,” who doesn’t really mean much harm but whose “excessive tendencies toward consumption are not exactly ennobling.”

But Darman, in a provocative introduction to the 1,569-page document, points out that the budget “is not just a monstrous mass of cookies and crumbs. It is more: an implicit statement of values and expectations for the future.”

The budget revives Bush’s proposal to cut taxes on capital gains. It recommends allowing all but the highest-income families to set aside up to $5,000 a year in savings in special accounts in which earnings would accumulate tax free. It proposes to permit first-time home buyers to withdraw up to $10,000 from existing individual retirement accounts without penalty.

Moynihan Challenged

In challenging a proposal by Sen. Daniel Patrick Moynihan (D-N. Y.) aimed at cutting Social Security taxes by $55 billion in 1991, Bush suggests that the rising Social Security surplus should continue to be set aside so that government funds, starting in the mid-1990s, could be used to whittle down the $3-trillion federal debt.

The Bush Administration’s plan for the 1991 fiscal year calls for a mixture of spending cuts and increases that, together, would save about $18 billion, largely from domestic programs.

On the revenue side of the ledger, the budget recommends numerous small changes in taxes and user fees--many of which Congress has rejected in the past--that would add up to $19.5 billion in additional income for the government.

It includes what the budget frankly identifies as at least one “gimmick”--a speed-up in the collection of payroll taxes from employers. It assumes that tougher IRS enforcement would collect an extra $3 billion.

Under Bush’s proposal, which is sure to be challenged by Congress, new Pentagon budget authority would rise slightly next year to $295 billion. Actual spending would fall $3.9 billion short of the amount necessary to keep up with inflation.

That modest initial defense budget savings, Darman wrote, makes a mockery of those who are already contemplating how to allocate a large “peace dividend” as a result of the sharply diminished military threat from the Soviet Bloc.

“Washington entertains the notion of spending 50 times a dividend that has not yet definitively materialized--a true Wonderland phenomenon,” Darman argued in his introduction.

Debate on Savings

Despite Darman’s disclaimer, the debate over where to allocate money saved by cutting Pentagon spending is likely to dominate the political arena this year and in the decade ahead.

Indeed, the budget director conceded in a television interview on Sunday that the “peace dividend over the long term could be as large as people are saying. It could be well over $100 billion, well over $150 billion; by some counting, even over $200 billion.”

Soon after the budget was released, House Speaker Thomas S. Foley (D-Wash.) emerged from a White House meeting with the prediction that Congress would demand a “larger reduction” in defense spending than Bush recommended.

Democrats on Capitol Hill, mindful of Bush’s strong standing in public opinion polls, avoided denouncing his budget as “dead on arrival,” as they often did with Reagan’s spending proposals.

Nonetheless, House Majority Leader Richard A. Gephardt (D-Mo.) referred to Bush’s proposal as a “stand-pat budget. I don’t think it’s a budget that really meets our needs.”

But Bush Administration officials strongly defended their budget proposals, arguing that they are necessary to foster a healthy economic climate at a time when economic growth has ground virtually to a standstill.

“Obviously, the slowdown in the fourth quarter makes everybody nervous,” Treasury Secretary Nicholas F. Brady said at a briefing for reporters.

That is one reason, Brady said, that “we must meet the Gramm-Rudman target without raising taxes and take important steps towards encouraging long-term investment in our country’s economic future.”

The Gramm-Rudman deficit-reduction law mandates a deficit no higher than $64 billion in 1991 and a balanced budget by 1993.

Economic Predicament

Michael J. Boskin, the White House’s chief economist, acknowledged that the Administration is caught in a predicament: Its budget goals rely on achieving major economic gains, but the economic goals depend not only on cooperation from the Federal Reserve but also on a deficit-reduction agreement between Congress and the White House.

“Our forecast is conditional on the President’s proposals being adopted,” Boskin said.

Budget Director Darman, in his 15-page budget introduction, lambasted Congress for fiscal irresponsibility. He argued that hidden “Pac-Men” threaten to gobble up future government resources, and he defended Bush’s relatively modest budget initiatives as “investments in the future.”

But Darman, who has attempted to overcome his reputation in Washington for arrogance, may have pushed his wit and eloquence a bit too far for some tastes.

When asked by a reporter whether the budget was written “by a man who may be another Sesame Street character, ‘Oscar the Grouch,’ ” Darman replied: “That may be the kindest thing that’s said of me.”

Overall, Bush’s $1.23-trillion budget would be one of the most austere in recent memory, attempting to hold fiscal 1991 spending to just a 3% increase, well below the expected rate of inflation of 4.2%. But it may be hard for Bush to keep spending down. Last year, federal outlays rose 7.5% after increasing 6% in 1988.

Robust economic growth, with a little additional push from Bush’s modest new tax and user fee proposals, is projected by the budget to propel revenues up by 9%, to $1.17 trillion.

One of the most significant elements of the Bush budget is his decision to begin scaling back on defense. With the Cold War on the wane, the Pentagon budget calls for eliminating 38,000 troops and closing dozens of military bases.

“Remarkable changes have occurred during the past year,” Bush said. “The Berlin Wall has been opened, and democratic forces are on the move in Eastern Europe. As a result, savings in the defense budget are now possible.”

Bush contended that Soviet military capability “will remain formidable, even after announced reductions,” and said he was proposing a cautious start to reducing the Pentagon budget that would allow the nation “to hedge against an uncertain future.”

Tax Cut Plan Revived

After a bitter partisan fight last year over his proposal to cut taxes on capital gains--profits from the sale of stocks, bonds, real estate and the like--Bush revived his plan in a different form.

The proposal, which is supposed to generate an extra $4.9 billion in revenues in 1991 by stimulating extra turnover of investments, would give increased tax breaks for assets that are held longer. By excluding 30% of the gain, the tax rate for most investors would be 19.6% on assets held for three years. But assets held for just two years would be taxed at 22.4% and those held one year would be taxed at 25.2%. That compares with a normal top rate of 28%.

Even many lawmakers who oppose the plan as a giveaway to the wealthy concede that some type of capital gains proposal is likely to be passed by Congress this year.

For less affluent taxpayers, Bush is proposing a far-reaching initiative that would create a major new tax haven for savings. A so-called family savings account would allow a family with income of less than $120,000 to contribute as much as $5,000 to a tax-exempt account. Single persons with incomes up to $60,000 would be allowed to contribute $2,500.

There would be no initial tax deduction, which means the proposal would constitute only a minor drain on the Treasury in its early years. But, after seven years, the money could be withdrawn without owing any taxes.

BUDGET TIMETABLE Monday--President Bush submits to Congress his fiscal 1991 budget, which, under the Gramm-Rudman law, must project a deficit no greater than $64 billion. April 15--Congress is supposed to adopt a budget resolution, meeting the $64-billion target, to guide subsequent spending and tax legislation. June 15--Congress to make any changes necessary in existing laws to achieve spending and revenue changes called for in the budget resolution. (This has not been done in previous years.) Aug. 25--OMB issues a report on the estimated fiscal 1991 deficit, based on spending and tax legislation enacted up to Aug. 15. If the deficit exceeds the $64-billion target by more than $10 billion, the President issues an order cutting most domestic and defense programs sufficiently to reach $64 billion. Oct. 1--Fiscal 1991 begins. If Congress still has not cut the deficit to $64 billion, the President imposes automatic spending cuts. Oct. 15--OMB issues a final report, revised to account for recent congressional action. If Congress still has not trimmed the deficit, the President issues a final order making the spending cuts permanent. A DECADE OF CHANGING BUDGET PRIORITES OUTLAYS 1981: Defense and Foreign Policy: 24.9% Elderly and Disabled: 37.9 % Poverty Programs: 7.0% Investment in Economy and Education: 15.2% Other: 5% Net Interest: 10.1% 1986: Defense and Foreign Policy: 29.2% Elderly and Disabled: 37.8% Poverty Programs: 5.8% Investment in Economy and Education: 9.1% Other: 4.5% Net Interest: 13.7% 1991: Defense and Foreign Policy: 26.1% Elderly and Disabled: 40.5% Poverty Programs: 6.1% Investment in Economy and Education: 9.0% Other: 4.3% Net Interest: 14.0% REVENUES: 1981: Individual Income Taxes: 47.7% Payroll Taxes: 30.5% Corporate Income Taxes: 10.2% Excise Taxes: 2.9% Other Taxes: 8.7% 1986: Individual Income Taxes: 45.4% Payroll Taxes: 36.9% Corporate Income Taxes: 8.2% Excise Taxes: 4.0% Other Taxes: 5.5% 1991: Individual Income Taxes: 45.1% Payroll Taxes: 35.9% Corporate Income Taxes: 11.1% Excise Taxes: 3.2% Other Taxes: 4.5% Source: OMB and Democratic Study Group

Source: Office of Management and Budget