Federal Government Prepares Shutdown in Budget Standoff : Deficit: Bush refuses to sign an emergency spending bill. Lawmakers plan weekend meetings in hopes of breaking the fiscal deadlock.

The government prepared to pull the plug on all but its most critical operations at midnight Friday as the White House indicated that President Bush would not sign emergency legislation to maintain federal spending following the defeat of a bipartisan budget accord.

Democratic leaders of Congress, while powerless to force Bush to keep the government running, planned to focus the blame on him by hurriedly approving a stopgap spending bill while they scrambled to develop a new budget blueprint aimed at winning support from a majority of lawmakers.

The House, which rejected the $500-billion budget agreement early Friday morning, voted 300 to 113 later in the day to approve legislation to maintain spending at current levels for another week. The Senate later approved the measure by voice vote.

Lawmakers planned a special session today--and possible meetings throughout the three-day Columbus Day weekend--in hopes of breaking the fiscal stalemate before Tuesday’s normal work day begins.

As dozens of proposals floated wildly around the corridors of Capitol Hill, a number of top lawmakers began talking about making changes to the rejected budget agreement to scale back proposed Medicare cost increases for the elderly while possibly reviving plans to approve higher income taxes on the wealthy along with a lower capital gains rate on investment profits.

“There’s a lot of chefs around here with different recipes,” said Rep. Robert J. Mrazek (D-N.Y.).

The planned shutdown of the federal government was expected to lead to nighttime disruptions in air travel as early as this evening. But most Americans would notice little immediate impact from the abrupt cutoff of government services unless the crisis is not resolved by Tuesday, when most federal employees are scheduled to return to work.

The Pentagon might be forced to scale back its operations, officials said, but many Defense Department employees, including military personnel in the Persian Gulf, would remain at their posts because they are considered emergency workers.

The shutdown of government operations would be significantly more widespread than the cutbacks that would be imposed if provisions of the the Gramm-Rudman deficit-cutting law were been allowed to take effect.

Under Gramm-Rudman, funding for many agencies would be reduced by about a third if a stopgap funding measure were signed into law in the absence of a deficit-reduction plan. The more extensive shutdown is required because no temporary funding measure was adopted.

Meanwhile, Wall Street shrugged off the initial failure of the budget accord in Congress, with the Dow Jones industrial average Friday falling just 6.19 points on the New York Stock Exchange. Although jittery financial markets were jolted early and bounced around during much of the day, the reaction in markets around the globe was far more muted than Federal Reserve Chairman Alan Greenspan had predicted earlier this week.

“The markets are focused on the Mideast, and the rest is just conversation,” said Marco Babic, a financial economist at Evans Economics here.

Moreover, many analysts dismissed the budget stalemate as little more than a silly game of chicken between Congress and the White House. “The market view is that they will get their act together,” said Robert Hormats, vice chairman of Goldman Sachs International in New York.

Turning up the heat under lawmakers to produce a spending plan for the 1991 fiscal year that began on Oct. 1, White House officials said the President would not sign any temporary financing bill until Congress completes a broad budget outline that Bush finds acceptable.

“We would close down the government (Friday) midnight,” Marlin Fitzwater, Bush’s chief spokesman, said.

By refusing to sign a continuing resolution to maintain government services, Bush would avoid casting a veto that would allow Congress to overturn his actions by a two-thirds vote.

The President can wait as long as 10 working days before deciding whether to sign or veto the emergency legislation. That would give the White House a lever to prod lawmakers into including Administration officials in the intense negotiations aimed at overcoming the impasse that began almost immediately after the budget agreement was defeated Friday morning.

In announcing Bush’s decision, Fitzwater said the White House wanted Congress “to finish the job--if they didn’t like the agreement they got last night,” lawmakers should “come up with a better one . . . and let’s get it passed.”

That’s just what lawmakers were desperately trying to do.

On Capitol Hill, congressional leaders said they would hurriedly prepare a new, bare-bones budget designed to mollify lawmakers who opposed sharp Medicare premium hikes and objected to proposed tax increases that fell largely on middle-income and poor Americans. Northeastern lawmakers also vehemently opposed the proposed 2-cents-per-gallon tax on home heating oil, while many Democrats objected to a provision calling for a two-week delay in unemployment payments.

“This is not the end of the world,” House Speaker Thomas S. Foley (D-Wash.) told reporters at breakfast. “I think we will be formulating our own budget plans. We will, of course, keep in touch with the White House, but I do not anticipate . . . the resumption of anything that would be called summit talks.

“It was a difficult, unrewarding process that produced an agreement that no one likes,” Foley added.

The detailed budget package agreed on by the White House and congressional leaders last Sunday laid out specific tax increases and benefit cuts, allowing lawmakers to pick it apart provision by provision.

House Budget Committee Chairman Leon E. Panetta (D-Carmel Valley) was working on what one lawmaker called a “fill-in-the-blanks budget” that would leave the details of tax increases and Medicare cuts largely to the House Ways and Means Committee.

This alternative, said Rep. Marty Russo (D-Ill.), would call for tax increases of $128 billion over five years and cutbacks in Medicare of $42 billion, only $12 billion of which would be paid by the elderly. It would also require the committee, chaired by Rep. Dan Rostenkowski (D-Ill.), to find another $22.6 billion in unspecified benefit cuts or tax increases.

By comparison, the bipartisan budget agreement contained $133.8 billion in tax increases and roughly $60 billion in Medicare savings, half from beneficiaries.

The package would also call for the Pentagon to make deeper cuts than those contained in the rejected package.

“This is something we can move with bipartisan support,” Russo claimed.

But House Republicans said the proposed changes seemed aimed at attracting disaffected liberal Democrats rather than conservative Republicans whose primary objection was to higher taxes.

“The same folks who designed the last (rejected) budget are trying to design a new one,” complained Rep. Robert S. Walker (R-Pa.), chief assistant to House GOP whip Newt Gingrich of Georgia. “No one’s consulted us.”’

Noting that a budget resolution could be passed with a coalition of moderates and conservatives or of moderates and liberals, Walker added: “Maybe they’ve already decided to go left.”

At the White House, Bush met with his Cabinet at 3 p.m. “to discuss the budget and the possible close-down of the government,” Fitzwater said. He said the Office of Management and Budget provided guidance to the various agencies and departments on how to “approach the possibility of a close-down at midnight.”

Bush dispatched his budget director, Richard G. Darman; White House chief of staff John H. Sununu, and Treasury Secretary Nicholas F. Brady to meet with congressional leaders to explore possible compromises.

But the President appeared to keep some distance from the actual negotiations. Fitzwater said Bush, at least as of midday, had not discussed any specific provisions of the budget package with members of Congress.

“The first skirmish is over,” Fitzwater said, “but there’s more ahead.”

Staff writers James Risen, James Gerstenzang, Ed Chen and David Lauter contributed to this story.

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