Budget Agreement Having Positive Effect on Congress : Deficit: It demands fiscal discipline, requiring spending caps and a pay-as-you-go provision on taxes.

There’s a big surprise regarding the controversial--and supposedly toothless--budget deficit-reduction accord that Congress and the White House struck last autumn: It’s working.

When the deficit-reduction pact was announced last fall, skeptics immediately assumed that the accord would disintegrate in the free-spending atmosphere that has pervaded Congress for so many years.

Critics predicted the lawmakers easily would find ways to get around the complicated set of spending restraints that the agreement set down--just as they had repeatedly avoided the supposedly hard-and-fast deficit targets in the Gramm-Rudman balanced-budget law that preceded it.

But the new agreement is proving to have some teeth of its own--and they are beginning to bite, controlling budget-busting habits of the past and fundamentally changing the way Congress handles spending and taxation.

“It’s the most demanding fiscal discipline Congress ever imposed on itself,” says Sen. Jim Sasser (D-Tenn.), chairman of the Senate Budget Committee and a key participant in the marathon budget negotiations last fall.

The reasons for the accord’s surprise success are two little-noticed provisions that have, at least temporarily, brought a new sense of fiscal responsibility to Capitol Hill.

One imposes rigid spending caps for three major categories of spending: domestic programs, defense and international outlays. If Congress votes to spend above the cap for any category, it would trigger automatic spending reductions on every program in the category to bring outlays below the ceiling.

A second is a pay-as-you-go provision that requires Congress to offset tax cuts with tax increases and simultaneously bans any proposal for an expansion of mandatory benefit programs, such as Medicare, that isn’t accompanied by a companion plan for offsetting reductions or tax increases to help pay for it.

“People didn’t really notice the (budget) process reforms, which are far more significant than Gramm-Rudman (deficit targets),” says Norman Ornstein, a specialist on Congress at the American Enterprise Institute, a Washington think tank.

“It’s really very difficult to get around the constraints without a total consensus,” Ornstein says. “It’s changed the rhetoric and that’s changed the reality. They (members of Congress) are making a good-faith effort to make this work.”

There are these developments:

--Warning that “there’s no free lunch,” House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) has put advocates of popular tax breaks for research, mortgage revenue bonds and low-income housing on notice that for the first time they will have to come up with tax increases to offset any revenue losses.

--Last week, the Senate rejected, by a surprisingly large 60-38 vote, a politically popular proposal by Sen. Daniel Patrick Moynihan (D-N.Y.) to cut Social Security payroll taxes, partly because the measure did not provide for any way to pay for the reduction.

The senators then agreed to require a 60-vote majority--rather than the usual 51 votes--to stop further raids on the Social Security trust fund. By contrast, in previous years the proposal to cut Social Security taxes passed the Senate overwhelmingly.

--When Congress inadvertently went $7.3 million over budget on spending for domestic programs, the Office of Management and Budget ordered a minuscule--but effective--across-the-board cut of 0.0013% in domestic programs, or $13 for every $1 million.

In the past, the OMB did not have this power.

To be sure, the new mood in Congress isn’t likely to produce dramatic results any time soon. The deficit for the current fiscal year is estimated at a record-high $300 billion and the one for the following year may show red-ink spending of $285 billion or more.

But much of the current deficit problem stems from factors Congress cannot control: The economic recession has reduced revenues sharply. Interest on the debt has soared. And tens of billions of dollars are being spent to protect depositors at failing savings and loan institutions.

Budget analysts say that if the economy begins to recover soon and the White House and Congress live up to their budget commitments for the entire five years of the accord, the deficit could drop below $100 billion in fiscal 1995 for the first time in 14 years.

“The old Gramm-Rudman law was blunt, at times irrational and quite unfair,” says Robert D. Reischauer, director of the Congressional Budget Office. “The new enforcement system is quite flexible and quite refined. You have an internalized discipline system.”

Reischauer says Gramm-Rudman punished Congress with spending cuts for developments over which it had no control--such as a recession or the weather in farm areas. The new pact more directly relates spending cutbacks to overspending by congressional committees.

The new system faced its first real test last March, when Congress considered a “dire emergency” appropriations bill.

The budget accord provided an exemption from the spending caps if the White House and Congress agreed the funds were critically needed.

This tempted lawmakers to revert to their old ways and add costly programs, such as higher subsidies for distressed dairy farmers, but the OMB held firm, threatening a presidential veto if such non-emergency provisions were kept in the bill.

As a result, Congress backed down and dropped the dairy program and others that the OMB challenged.

For its part, the Bush Administration even opposed additional funds that it was seeking for the Pentagon, lest the add-ons breach the newly imposed spending cap.

“Congress deserves high grades for staying with the agreement,” says former Rep. Bill Frenzel (R-Minn.), a participant in the budget summit talks who has been pleasantly surprised by the outcome.

Frenzel is particularly pleased that the Senate crushed the Moynihan plan to reduce Social Security payroll taxes. “It’s a lot of fun to give away money,” he says. “But I would have to say that the Senate reacted to that (proposal) with fiscal maturity and sobriety.”

One of the chief proponents of the new regime on Capitol Hill is Rep. Leon E. Panetta (D-Carmel Valley), chairman of the House Budget Committee, who acknowledges that even his personal agenda has been affected by the new accord.

For years, Panetta has been the leading proponent of a $1-billion-a-year expansion in federal food programs to help deal with hunger and malnutrition. Under the new rules, however, to push the program through Congress he must find the revenues to pay for it.

Even Rostenkowski has had to check his enthusiasm for pet legislation. For example, the Chicago Democrat has advocated expanding individual retirement accounts to help middle-income Americans increase their tax-deferred savings. But now he, too, must search for offsets.

“The IRAs are the greatest thing since ice cream, but how do we pay for them?” he asks, referring to the multibillion-dollar tax revenue losses that are projected if such a measure should pass. “If we can’t pay for them, they’re not going to be seen in this budget.”

These kinds of changes in attitude have drawn praise from such veteran budget analysts as Alice M. Rivlin, the CBO’s first director. “So far, so good,” she says.

But there is widespread concern that the five-year accord may start to unravel after the 1992 presidential election because of growing pressures to relax or discard the spending caps.

“The real question is: How long can we live with these limits?” the CBO’s Reischauer says. “It’s a zero-sum game, and every time someone gets an increase, someone else loses.”

Rostenkowski agrees. “The budget agreement was a breath of fresh air,” he says, “but I’m not sure it marks a permanent change in the weather. It may be a passing breeze.”

Frenzel, however, believes that the White House and the congressional leaders may decide to keep the framework of the agreement even if they revise the spending ceilings. About 60% of the deficit reduction will come in the final two years of the pact, he says.