Salvage of Budget Accord a Test of Bush’s Influence : News ANALYSIS

Two weeks after he endorsed a bipartisan budget agreement that was then rejected by the House, President Bush is facing a major challenge to his influence over domestic policy: How much of the original $500-billion deficit-reduction package can be salvaged?

Although House Democrats insist they will stand by the same targets for cutting the federal deficit as were in the accord, they are drafting a sweeping revision that drops many of the key budget changes that the President wanted and adds some that he strongly opposes.

The new Democratic alternative is considered likely to pass the House this week--possibly with some Republican votes.

Some senior White House officials fear that the Administration’s power to shape the budget process has been so weakened during the last two weeks of political skirmishing that the White House may get far less than it once hoped.

Rep. Bill Frenzel (R-Minn.), a senior member of the House Ways and Means Committee, predicts that the most likely outcome is that lawmakers will drop the most controversial parts of the original package and settle for a decidedly smaller cut in the deficit instead.

The change has serious implications. Charles L. Schultze, former budget director for President Lyndon B. Johnson, said that despite its faults the original accord was “the first one in memory that really did something serious to resolve the budget situation.”

While it still is possible that the White House may strike a meaningful new deficit-reduction agreement with Congress, “I wouldn’t bet the farm on anything,” Schultze said in a telephone interview Saturday.

The lack of a significant cut in the deficit, in turn, could spell real trouble for the nation’s economy. If the United States can’t get its fiscal house in order, financial markets could plunge into turmoil and send the dollar plummeting even faster on the foreign exchange markets.

With Washington still heavily dependent on borrowing abroad, it could jeopardize Bush’s ability to finance the U.S. deployment in the Persian Gulf. The British had to turn back from a similar venture involving the Suez Canal in 1956 because of a currency crisis.

Bush, who has decided to play only a passive role for now, was expected to throw his support behind a fallback deficit-cutting plan approved by the Senate Finance Committee early Saturday and endorsed by the Democratic and Republican leadership.

The committee plan would reduce the deficit by $192 billion over the next five years--a major component of the $500-billion target in the original accord--by relying on an increase in the gasoline tax, higher tax rates for the rich and higher Medicare payroll taxes.

While Bush’s advisers say he prefers the finance committee plan to the alternative being pushed by House Democrats, he likely will wait until the two houses have settled on a single compromise budget package before making his next move.

Treasury Secretary Nicholas F. Brady said Saturday in an interview on CNN’s “Newsmaker Saturday” that Bush will not try to influence the outcome of this coming week’s expected budget showdowns in the House and Senate.

“The ball is now in Congress’ court,” Brady said. “When the President sees that legislation, he’ll react to it and decide what to do. . . . The President has no role in the (budget) reconciliation process. . . . He’ll react to it.”

If Bush remains a passive bystander in the budget battle--a sharp departure from his approach in previous legislative fracases--the shape of the package is likely to be decided primarily by a Senate-House conference committee.

Even so, the President’s veto remains a powerful weapon in the battle over deficit reduction. As Senate Majority Leader George J. Mitchell (D-Me.) conceded last week: “We can’t pass it (a budget plan) without his signature.”

Mitchell, who also is a member of the finance committee, called the panel’s package “a fair compromise.” His GOP counterpart, Sen. Bob Dole (R-Kan.) declared it to be “right and necessary.”

But House Democrats have taken a different tack, backing a plan by House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) that would sharpen the difference between the two parties by enacting a populist tax package that puts the greatest burden on the rich.

Bush has warned repeatedly that unless Congress enacts a deficit-reduction bill by Friday he will shut down the government again on Saturday, when the legal authority for current federal spending--a stopgap resolution approved a week ago--expires.

But if he rejects the Democrats’ alternative--particularly if it focuses the deficit-reduction burden on the wealthiest 10% of American taxpayers, as the Democrats now plan--Bush will face a real political dilemma: He will have to call for larger tax hikes for the middle class.

Already, Republicans who must face the voters on Nov. 6 are complaining that they are being pictured unfairly as protectors of the rich, while Democrats are portraying themselves as advocates for middle-income and lower-income Americans.

And even Republican political activists concede that Bush’s twists and turns on budget policy have disheartened his GOP allies in the House and sent the President’s approval ratings into a tailspin.

One key issue is whether consumers will face a doubling of gasoline taxes, as provided by the Senate Finance Committee proposal, or whether gas taxes remain the same and the wealthiest Americans pay higher income taxes, as the House Democrats prefer.

Even House Republicans, while sharply divided over whether to present their own alternative, are virtually unanimous against voting higher gasoline taxes with the November elections only three weeks away.

Particularly in the House, the Democratic proposals are designed to take maximum advantage of the President’s dilemma, by currying more favor with middle-income voters by providing them with more tax breaks at the expense of wealthier taxpayers.

Rostenkowski has proposed a novel plan to allow the vast majority of taxpayers to enjoy up to $100,000 worth of capital gains during their lifetimes, except for profits from the sale of securities.

Another proposal would allow tax-free profits of up to $1,000 each year from the sale of stocks and bonds. Both would concentrate the benefits at those earning less than $100,000 a year.

For now, one major difference between the President and the lawmakers is that he still seems to regard the defeated budget summit accord as a worthwhile exercise, while they see it as a bust that failed to take account of political realities.

The Senate’s Mitchell, who was one of the summit negotiators, said Saturday that Bush’s adamant stand in favor of a $60-billion reduction in Medicare spending was the “biggest single problem” at the summer-long talks on the budget accord.

The Medicare cuts spawned a vehement backlash among the elderly that was a principal factor in the 254-179 House vote that buried the deficit reduction package.

“What we need is a better blend of political reality and budget necessity,” Mitchell said.

Meanwhile, Schultze and other analysts warn that if Congress and the White House don’t make serious inroads into reducing the deficit, it will leave the budget situation--and the country--in far more serious straits in 1991 and 1992.

With the economy heading into a possible recession and the United States possibly on the brink of war, the job won’t get any easier, Schultze points out.