Bush Economy Plan Likely to Be Modest : Recession: Bush cannot decide on extent of a defense cut to finance any ambitious recovery package, sources say.

White House officials now are planning a relatively modest economic recovery package for President Bush to unveil in next week’s State of the Union address, at least in part because Bush cannot decide how deeply and how quickly to cut the defense budget, Administration sources say.

Without sizable and immediate savings to announce from defense cuts, Administration officials concede, it would be difficult to finance a more ambitious package of anti-recessionary tax cuts.

A more modest plan could lead to widespread criticism of the President for not dealing more forcefully with the recession, just as the 1992 election season intensifies. Such political fallout could be especially damaging for Bush in early primary states like New Hampshire, which has been hit hard by the slump.

A senior White House official, speaking on condition of anonymity, acknowledged that the modest nature of the plan may result in some political problems for the Administration. But the official said Bush and his advisers will stress in their public statements that the economic package is aimed at long-term solutions to the nation’s economic woes, rather than a dangerous quick-fix.

Sources said that the last-minute decision process at the White House remains extremely fluid and that Bush still could decide on specific defense reductions.

If that happens in the next few days, the reductions could be used to finance some aspects of the Bush economic package and could increase the size of proposed tax cuts, sources said.

If deep cuts are not announced next week, sources have indicated, Bush may simply express a willingness in his speech to work with the Democratic-majority Congress to find more defense savings that could be applied to stimulating the economy--without getting into the details.

Bush has vowed that his economic stimulus plan will not increase the size of the federal deficit and must be paid for by measures that either cut spending or raise revenues.

Yet, without using defense spending cuts to offset tax reductions, Bush may be forced to propose financing his economic plan at least in part with controversial measures that seem likely to be rejected by Congress. They could include unpopular cuts in Medicare benefits and other entitlements for affluent Americans.

Despite the lack of a peace dividend to help fund an economic plan, the broad outlines of the Bush package are still likely to include an expansion of the personal exemption on income taxes for families with children, a tax credit for home buyers and an enhancement of individual retirement account benefits for middle-class Americans, as well as a capital gains tax cut and other business incentives. But the total value of the package in the end may be less than anticipated.

Adding to Bush’s difficulties, a group of congressional conservatives Tuesday bluntly warned senior White House advisers that they may sponsor their own economic growth proposal unless the President’s package is more far-reaching than it now appears.

The conservatives were said to have urged in particular that Bush back a capital gains tax cut far deeper than he now seems ready to embrace.

Bush has met with Defense Secretary Dick Cheney repeatedly over the last few days, but the two apparently have been unable to agree on a new round of cuts to reflect the collapse of the Soviet Union, sources said.

That difficulty in moving decisively to slash Pentagon spending underscores the complexities that Washington is likely to face in the coming years as it seeks to wind down America’s defense Establishment in the post-Cold War era.

Defense analysts said that, although some money can be saved from cutbacks in weapons and equipment purchases, the steeper cuts needed to fund a big economic package would almost inevitably lead to stark reductions in active military and National Guard personnel, which raises serious questions among military planners about the structure of American forces.

Pentagon planners fear a “hollowing out” of combat and support units that would reduce their effectiveness and make it more difficult to respond quickly to regional crises around the globe.

In his public statements, Cheney has been unusually candid in arguing against much faster or deeper cuts in military personnel.

But the Administration’s hesitancy comes at a time when leading Democrats in Congress are increasing pressure on the White House to quickly deliver a massive peace dividend from the Pentagon for use in the domestic economy.

Leading Senate Democrats, for instance, are united in urging Bush to support a massive economic recovery program, although they are divided on how to spend the peace dividend. Some want the funds to go for a middle-class income tax cut, whereas others want to divert billions of dollars into public spending on roads, bridges and schools.