25% Spending Cut Looms as Deficit Soars

The Bush Administration, raising its latest deficit estimate for next year to $169 billion, warned Monday that the federal government faces spending cuts this fall of at least 25% in a wide range of defense and domestic programs unless Congress and the White House forge a budget compromise.

Richard G. Darman, director of the White House Office of Management and Budget, said that the roughly $100 billion in automatic cuts scheduled to go into effect in October under the Gramm-Rudman deficit reduction law would eliminate about half of the nation’s military forces, produce chaos in the air traffic control system, prevent any new hazardous waste cleanups and wipe out federal grants to 2.2 million college students.

“This is not some far-fetched theoretical construct,” Darman told reporters. “If the summit (budget) negotiations fail . . . these effects of sequester are exactly what we will face in the fall.”

The dire warning was issued as the White House released its official deficit forecast for the fiscal year that begins on Oct. 1. The $169 billion in projected red ink is $9 billion higher than its unofficial forecast last month and far in excess of the $64 billion deficit target called for under Gramm-Rudman.

And the new deficit forecast--based on what would occur if Congress makes no changes in current spending and tax policies--does not include the cost of cleaning up the savings and loan mess, which would swell total borrowing for fiscal 1991 to $231 billion.

Administration officials and congressional leaders privately agreed in May, shortly after beginning a round of “summit” budget negotiations that is still under way, that it would be impossible to reach next year’s $64-billion deficit goal.

Instead, they hope to ease the stringent Gramm-Rudman targets by passing legislation to set new targets that will balance the budget in 1995, instead of 1993. The legislation, they hope, would allow them to hold the cuts to roughly $50 billion.

The White House is engaged in a risky game of political chicken with rebellious lawmakers from both parties. Many House Republicans have vowed to oppose any budget deal that includes a tax increase. The White House--and the Democrats--so far has been reluctant to take the first step by calling for new taxes or cuts in popular programs. Some Democrats want to force the White House to move first by permitting the automatic cuts to go into effect for at least a short time.

To forestall such moves, the Administration, with the support of key Democratic and Republican budget negotiators, is stepping up its campaign to force action before the Oct. 15 Gramm-Rudman deadline by detailing in advance how devastating the automatic cuts would be.

“These new numbers should hit the White House, the Congress and the (budget) summit like a fire alarm in the middle of the night,” said Rep. Leon E. Panetta (D-Monterey), chairman of the House Budget Committee. “Now is the time of reckoning.”

Administration officials tried to impress on House Republicans in particular that the only choice is either to accept a budget deal including higher taxes or face the consequences of destroying hundreds of popular and essential federal programs. Until Congress approves a credible deficit-reduction package, Treasury Secretary Nicholas F. Brady insisted, the White House will not flinch from carrying out the automatic cuts.

“The law is the law,” he said. “We’re going to obey it.”

If the Administration is required to impose a $100-billion spending cutback, the Gramm-Rudman meat ax would carve 25% from most defense operations and slice 38% from a wide variety of domestic spending programs. But government benefits to the elderly and the poor, such as Social Security, Medicare and food stamps, would be largely immune.

The automatic cuts, Bush warned in a statement, “will affect almost all that the federal government touches . . . . It is, therefore, all the more important that the budget summit reach agreement promptly and that the Congress act responsibly to bring the deficit down.”

However, congressional Democrats continued to blame Bush for failing to speak out publicly on the budget.

“Only the President can persuade the country that we have a problem,” House Majority Leader Richard A. Gephardt (D-Mo.) told a group of Times editors and reporters in Los Angeles.

Gephardt expressed skepticism about the chances of reaching a deficit agreement in the absence of a crisis, and he worried that imposing the automatic cuts might be the only action that would persuade reluctant lawmakers to ratify such a deal.

“It would be a true reality test,” he said. “Maybe that is the only way we can demonstrate how serious the problem is.”

Sen. Pete V. Domenici of New Mexico, the leading Republican on the Senate Budget Committee, argued that budget negotiators must ultimately reach a compromise because the alternative of widespread automatic cuts would produce “nothing short of pandemonium.”

The latest deficit figures, which now put the White House in line with earlier projections by the nonpartisan Congressional Budget Office, far exceed Bush’s own projection just six months ago of a $100.5 billion gap between spending and revenues.

By relying earlier on more optimistic assumptions and by dismissing the S&L; cleanup costs, the White House was able--at least on paper--to reach the Gramm-Rudman target with only about $38 billion in varied spending cuts and relatively minor tax increases.

But a string of errors in the White House forecast--caused by the economy’s failing to live up to the Administration’s rosy expectations, a drastic falloff in the growth of tax revenues and the swelling costs of the S&L; bailout--forced the Administration to admit its huge miscalculation and seek a budget compromise with Congress.

The bad news began to hit the federal budget as the economy slowed late in 1989. After several years in which the federal deficit stayed level at roughly $150 billion, the White House now expects federal borrowing, including S&L; costs, to swell to $218.5 billion this fiscal year.

Even excluding S&L; costs, this fiscal year’s deficit is likely to exceed $161 billion, far above the current $100-billion Gramm-Rudman target.

Exceeding the target after the fiscal year begins carries no penalty and requires no action under the Gramm-Rudman law.

Without budget changes, the overall deficit would exceed $200 billion for three years in a row before falling sharply in 1993 as the government begins to reap some financial benefits from disposing of the billions of dollars in distressed properties it has acquired from failed S&Ls.;

BACKGROUND

Congress, having repeatedly failed to cut the federal deficit, enacted the Gramm-Rudman deficit reduction law in 1985. The law set up a series of targets that each year reduced the allowable deficit by a specified amount. If the difference between projected spending and projected revenues is higher than the deficit target, automatic spending cuts go into effect. The yearly targets were originally structured so that the deficit would be wiped out by 1991. However, Congress postponed the final reckoning, setting new targets that would wipe out the deficit by 1993.

THE WORSENING FEDERAL BUDGET DEFICIT PICTURE What the Administration forecast (in billions of U.S. dollars)

Fiscal year 1990 1991 1992 1993 Last january: $119.7 93.2 72.9 39.2 Monday’s estimate: $161.3 169.0 163.7 140.6 New estimate including cost of S&L; rescue: $218.5 231.0 205.0 135.2

Source: U.S. Office of Management and Budet