$1.5-Trillion Budget Calls for Cuts in Taxes, Defense Outlay : Spending: Funding is static for most domestic programs in President’s fiscal plan. Administration promises that the package would produce economic recovery by midyear.

President Bush presented Congress on Wednesday with a $1.5-trillion budget for 1993 that combines proposed new cuts in defense spending, standstill funding for most domestic programs and a package of tax cuts that Administration officials vowed would produce a “certain” economic recovery by midyear.

The Administration said the $50.4 billion in new defense cuts it has proposed over five years must be used to reduce the deficit rather than to finance domestic needs. And it proposed to pay for $24.6 billion in anti-recession tax reductions, in part, with controversial caps on future growth of entitlement programs, such as Medicare and Medicaid.

The focal point of the budget for the fiscal year that begins Oct. 1 is an economic stimulus package containing a proposed $500 increase in the personal exemption for children as well as more targeted incentives, such as a cut in the capital gains tax and a $5,000 credit for first-time home buyers.

Senior Administration officials, seeking to portray the package as providing solutions to the nation’s short-term and long-term economic woes, promised that it would end the recession and add 500,000 jobs to the economy if Congress approves all of its provisions.

“Not only will it accelerate (the recovery), it will make it more certain,” said Michael J. Boskin, Bush’s chief economic adviser.

Treasury Secretary Nicholas F. Brady said the package would help “accelerate economic recovery in the short term and ensure long-term economic growth, increased competitiveness, and a higher standard of living for all Americans.”

In contrast to the sense of urgency conveyed by the Administration, Federal Reserve Board Chairman Alan Greenspan told members of Congress that he sees tentative signs that the economy is responding to recent interest rate cuts and said he expects a genuine upturn by spring.

Greenspan, in fact, expressed fears that the White House and Congress might go too far in trying to revive the economy. Addressing a Senate panel that is considering his reappointment, he said he has no qualms about adoption of a limited package of anti-recession measures, but he warned that a more stimulative plan could fan inflation and push interest rates back up.

The President’s 2,000-page budget, which forecasts that the federal deficit will balloon to a record $399.4 billion this fiscal year before declining to $351.9 billion in fiscal 1993, immediately ran into strong opposition from the Democrat-controlled Congress.

Key lawmakers assailed the President for refusing to make far deeper cuts in the nation’s armed forces so the resulting “peace dividend” could be used to fund bigger tax cuts or a more aggressive domestic spending agenda to help the poor and to create new jobs.

Without steeper defense cuts, the Bush plan represents “warmed-over Reaganomics,” said Sen. Brock Adams (D-Wash.), and includes “nothing substantive that will help middle-class and low-income Americans. . . . We need a Marshall Plan for America, and we need it now.”

Democrats also charged that the bulk of Bush’s proposed tax cuts are targeted at affluent individuals and the business community. “Bush’s plan for tax cuts was, again, aimed at the wealthiest Americans,” Sen. Albert Gore Jr. (D-Tenn.) said.

Many Democrats have vowed to fight Bush’s proposal to cut the top tax rate on capital gains--the profits from sales of stocks, bonds, real estate and other investments--to 15.4% for assets held more than three years. The package contains other proposals targeted primarily at business interests or investors, such as faster depreciation for new plants and equipment and “passive loss” deductions for developers.

But the anti-recession plan contains several tax cuts for ordinary Americans: the expanded personal exemption and the $5,000 home buyer credit, new deductions and credits to help pay for health insurance, a deduction for interest paid on student loans and use of individual retirement accounts to pay for home purchases, education expenses and medical care.

It also calls for another extension of federal unemployment benefits for victims of the current recession and will reduce federal withholding for wage earners to increase this year’s take-home pay, although it will cut next year’s tax refunds in the process.

Although Bush directed the Internal Revenue Service to reduce withholding immediately, other elements of the package would require congressional approval and take effect at different times. The $5,000 credit would apply to homes purchased between Feb. 1 and Dec. 31 of this year; the expanded exemption would take effect Oct. 1, and the capital gains cut would be phased in over three years.

The Administration’s detailed tax and budget proposals, which attempt to achieve the seemingly conflicting goals of stimulating the economy while containing the deficit, were released against the gloomy backdrop of the longest recession since World War II.

The stubbornness of the current slump was underscored Wednesday by new statistics showing that the economy shrank last year for the first time since 1982. The Commerce Department said the gross domestic product fell 0.7% in 1991. The economy began to expand again in the fourth quarter, but at an anemic annual rate of 0.3%.

The President’s 1993 budget--the first since the demise of the Soviet Union and the end of the Cold War--calls for additional cuts in the defense budget of $50.4 billion over the next five years, including $7.9 billion in the 1993 fiscal year. The reductions are over and above a first round of defense cuts approved by Congress a year ago.

Yet, even those relatively modest reductions overstate the actual effect on Pentagon spending. The President’s proposed cuts in actual defense outlays--as opposed to “authorized” spending--total just $5.2 billion in 1993 and $27.4 billion over five years.

Those figures pale in comparison with the cuts proposed by some leading Democrats, who want to slash Pentagon spending by $100 billion or more over the next five years and divert much of the savings to job-creating programs instead of tax cuts or deficit reduction.

Bush’s budget calls for an overall freeze on discretionary domestic spending, although some politically popular programs, such as Head Start, are targeted for increases. The freeze is certain to be opposed by Democrats who want to pour more money into public works projects.

The Administration also faces stiff opposition because of Bush’s apparent determination to avoid using any savings from Pentagon reductions to finance his proposed tax cuts, which would reduce government revenues by an estimated $24.6 billion over five years.

The White House said the tax cuts can be fully financed by other elements of the budget, including limits on the future growth of entitlement programs that provide benefits to all Americans who meet their eligibility requirements.

Although the Administration said the caps would reduce growth of entitlements by $68.4 billion over five years, it sought to downplay the impact on Medicare, which helps pay medical bills for the elderly and disabled, and Medicaid, which finances health care for the poor.

The specifics are not spelled out, but it appears that the Administration intends to trim payments to doctors and hospitals under both programs. The White House also will try to persuade a skeptical Congress to increase the monthly premium paid by Medicare participants with incomes of $100,000 or more for individuals and $125,000 or more for couples.

Although Bush asserted that his budget does not rely on any tax hikes to offset its tax reductions, a few small tax hikes and other new fees are buried deep in the budget document. For example, the Administration proposes to expand a telephone excise tax and alter the tax treatment of annuities; the two changes would cost taxpayers an estimated $300 million a year.

In his budget message, Bush urged Congress to “lay aside partisanship” in the midst of an election year. Yet leading Democrats, who see the nation’s economic woes as the key to the 1992 presidential election, quickly dismissed Bush’s deadline of March 20 for acting on his proposals.

“The President has given us 50 days to send him a solution, when it took him 480 days to notice we had an economic problem in this country,” said Senate Budget Committee Chairman Jim Sasser (D-Tenn.).

Here is a more detailed breakdown of the Administration’s proposed 1993 budget:

Environment, Energy

The President made environmental programs a high priority for 1993, requesting $18.3 billion, a 21% increase over last year.

Fully one-third of the money would be devoted to cleaning up the government’s military bases and nuclear weapons plants run by the Energy Department. But large sums also would go toward improving sewage treatment in six large cities, including Los Angeles and San Diego, and for battling air and water pollution along the Mexican border.

Los Angeles would receive $55 million and San Diego $40 million of the $340 million earmarked for cities that do not yet have adequate secondary sewage treatment. New York, Baltimore, Boston and Seattle also would get treatment grants.

The budget proposes $201 million for environmental projects along the Mexican border, responding to concerns that a developing U.S.-Mexican free trade agreement would worsen already bad pollution problems in the area.

The cleanup package includes $80 million to continue construction of the new Tijuana sewage treatment plant near San Diego, to expand treatment capacity at Nogales, Ariz., and to begin work on anti-pollution facilities on the New River in California.

The President requested $1.8 billion for Superfund cleanup of hazardous waste sites, $134 million more than Congress appropriated last year.

On energy programs, Bush renewed his controversial request to open the Arctic National Wildlife Refuge in Alaska to oil drilling. He requested $650 million for the superconducting super collider, a 34% increase for a program that Congress deeply slashed last year.

Law Enforcement

An emphasis on combatting violent crime and locking up drug traffickers dominated budgetary requests for law enforcement.

The FBI, in response to the end of the Cold War, plans to shift 185 counterespionage agents to fighting violent crime, particularly by gangs; another 65 former spy-chasers and domestic terrorism agents would investigate health care fraud.

The hard-line tone of the Administration’s request for $15.8 billion in anti-crime funds--8% more than fiscal 1992--comes as no surprise in an election year, but Justice Department officials offered new plans for fighting crime and paying the costs.

One proposal would generate $48.4 million by requiring federal prisoners to pay for their first year behind bars. The amount was based on an estimate that 9% of the roughly 30,000 inmates entering federal prisons annually could come up with $17,911--the average cost of a year’s imprisonment.

AIDS Funding

Total federal outlays for AIDS would increase by $565 million, or 13%, to $4.9 billion. That includes a proposed 4% boost for AIDS research, from $1.19 billion this year to $1.24 billion in 1993. AIDS research funding would be second only to cancer research, which would receive $2.04 billion.

Plans to map the human genome, the genetic pattern that determines the inherited characteristics of each individual, would be supported by a 7% increase, to $175 million. The project is expected to take 15 years and is believed to hold promise for the treatment of inherited disease.

Housing

President Bush’s request for $23.7 billion in authorized funding for the Housing and Urban Development Department represents a $1-billion decrease from last year, but it includes sharp increases for several innovative programs favored by HUD Secretary Jack Kemp.

The largest increase would go to the Homeownership and Opportunity for People Everywhere program to help public housing tenants buy their own homes. Kemp sought $865 million for the program last year, received $350 million and is asking for $1 billion for fiscal 1993.

Another Kemp proposal would let more than 1.3 million low-income families use the rental subsidies they now receive to help buy and maintain a first home. A new reform dubbed “Perestroika for Public Housing” would give tenants at the 23 most mismanaged public housing authorities across the country the right either to choose new managers for their projects or assume ownership and management responsibilities themselves.

Few of the proposals are likely to go far in Congress, however, where Democrats have criticized them for failing to address a chronic low-income housing shortage.

Transportation

The President proposed spending $2.2 billion less on urban mass transit than the $5.2 billion authorized by Congress in the transportation bill approved last year.

Transportation Department officials said the difference stems from the Administration’s continuing opposition to the use of federal transit funds to subsidize the operating expenses of bus or rail systems in metropolitan areas with populations of more than 500,000.

The Administration’s position has prompted sharp criticism from urban officials, who say they need the subsidies to avoid raising fares and losing riders.

Overall, Bush called for spending $36.6 billion on transportation, including money for highway, bridge and safety programs, urban mass transit, railroads, aviation, the Coast Guard and research. The total represents a 6.3% increase over the figure appropriated by Congress for fiscal 1992.

About $22 billion would be parceled out directly to states and local governments to help pay for construction and maintenance of roads and bridges and for capital improvements for bus and rail systems. The direct aid to states has been touted by the Administration as a way to create jobs and improve the economy.

Although Congress had approved spending at least $45 million on a pilot project to develop a high-speed, magnetically levitated train, the Administration set aside only $15 million to study the feasibility of the project.

Foreign Aid

The President requested about $11.5 billion in economic assistance, a 4% increase from the request for this year, and $4.5 billion for military assistance, an 11% reduction.

Most of the increase represents funds that would flow to the republics of the former Soviet Union. Military aid was cut to almost all countries except Israel and Egypt, which were promised continuing assistance as part of the Camp David accords in 1978.

The total includes $6.3 billion in aid to individual countries and $5.2 billion for multilateral programs, such as regional development banks and refugee assistance.

The request also includes $620 million for the former Soviet Union, essentially the amount that Bush announced last week at a 47-nation conference on assistance to the republics. Bush requested $450 million for Estonia, Latvia and Lithuania and the former Communist countries of Eastern Europe.

The economic aid request was virtually unchanged for most other recipient countries, although the Philippines request dropped to $188 million from $353 million this year. The reduction was even greater in military aid--$200 million dropped to $45 million. The Philippine Senate recently terminated the U.S. lease on Subic Bay Naval Base, ordering the Navy to withdraw by the end of this year.

Of the total economic aid budget, Israel would get $1.2 billion, or more than 10%. Egypt’s share is $815 million, or about 8%. Military aid to Israel is $1.8 billion, or 40% of the total. Egypt’s share is $1.3 billion, or 29%. Military aid to all countries other than Israel and Egypt totals $1.4 billion, a 31% reduction from the current year.

Education

The total Education Department budget would increase 10% to $32.3 billion.

A highlight of the spending plan, the Administration said, is the so-called “GI Bill for Children,” which would offer state governments $500 million in matching funds for scholarships of up to $1,000 for middle- and low-income students. Families could use the money to send children to the public or private elementary or secondary schools of their choice.

Congress has shown little interest in spending public funds on private schools, although a similar system at the college level has been considered successful for years. That program, known as Pell grants, is in line for the largest one-year increase ever, 22%, to $6.6 billion.

To make college courses more available to all age groups, the Administration has proposed offering more student loans, making the interest tax deductible and allowing penalty-free withdrawals from IRA accounts to pay for education costs.

In addition, Bush proposed the largest single-year budget increase in the 25-year history of Head Start, the preschool program for low-income, disadvantaged and disabled children. Funding would be authorized at $2.8 billion, a 27% increase over this year’s $2.2 billion.

The plan also calls for record spending on university research: $1 billion for basic research, including an 18% increase for the National Science Foundation, and another $1 billion for civilian research funds.

About $95 million has been proposed to establish the “world class” academic standards in English, math, science, history and geography called for by the department’s education reform plan.

Times staff writers Paul Houston, Ronald J. Ostrow, Michael Ross, Robert W. Stewart, Norman Kempster and James Bornemeier contributed to this story.

Impact of Bush Plan

A few of the people, places and things that stand to gain or lose under the 1993 federal budget plan.

WINNERS

Families: President Bush seeks to expand the personal exemption for dependent children by $500. He also wants to waive penalties on IRA withdrawals for medical and educational expenses. Tax credits to buy health insurance would be allowed.

Yacht dealers: Bush wants Congress to repeal the “luxury tax” imposed two years ago on boast and airplanes. Businesses contend the surtax has caused sales to plummet and workers to lose jobs.

Wall Street: Bush’s proposal to reduce the tax on capital gains would stimulate sales of stocks, bonds and other investment assets. Stockbrokers who take a cut of each transaction would be among the big beneficiaries.

Space Station Freedom: The 1993 budget contains $2 billion for the controversial program. Many space station components will be built in Southern California.

LOSERS

Immigrants: The budget cuts funding for previously authorized programs to assist newly legalized immigrants. It would have a big impact within Latino and Asian immigrant communities in Southern California.

Defense contractors: The shrinking of the nation’s military budget in the post-Cold War era will hit hard at the entire defense industry. The victims include major aircraft manufacturers and the shipyards that had planned to build a new generation of naval vessels.

Public housing authorities: The housing budget contains provisions that would allow tenants of poorly run public housing authorities to evict their managers. It would base federal subsidies of the number of occupied units in each project rather than total units.

Armed Forces: The Pentagon has agreed to eliminate one of every four uniformed personnel over the next five years as part of a dramatic downsizing of the armed forces.

THE 1993 BUDGET

Where it comes from: Individual income tax: 34% Social Security payroll tax: 29% Borrowing: 23% Corporate income tax: 7% Excise taxes: 3% Other: 4% Where it goes: Benefit payments to individuals: 43% National defense: 19% Net interest: 14% Grants to states and localities: 13% Deposit insurance: 5% Other: 6%

The Budget at a Glance

Components of the Deficit

Much of the federal government’s projected shortfall for 1993 is attributable to one-time expenses associated with the recession and the savings and loan bailout. The remaining “structural” deficit reflects the continuing imbalance between the government’s revenue and its spending plans.

1992 1993 Savings and loan bailout 20% 22% Recession 13% 14% Structural 67% 64%

Source: Office of Management and Budget

Debt Interest: A Growing Burden

As the federal deficit has grown, so have interest payments on the government’s debt. The size of the deficit as a percentage of the nation’s total economic output also is rising, although it is nowhere near the record level of 23.5% in 1944.

Figures in billions of dollars per fiscal year

Interest on debt Deficit ’88 152 155 ’89 169 153 ’90 184 220 ’91 195 269 ’92 200 399 ’93 215 352 ’94 232 211 ’95 243 192 ’96 254 180 ’97 264 182

Source: Office of Management and Budget