Clinton Weighing Tax Hikes, Spending Cuts : Transition: Major shift in priorities to deal with deficit could total $200 billion a year by end of his term.

President-elect Bill Clinton and his advisers, caught between campaign commitments to new programs and a widening federal deficit, are considering tax increases and spending cuts that could total $200 billion a year by the end of Clinton’s term, aides said Wednesday.

The shifts potentially could be the largest in government priorities since the Ronald Reagan budget revolution of 1981.

The question of how big an economic plan to propose and what to include in it have provoked a “furious debate” within the new Administration’s inner circle, Clinton’s friend and nominee for deputy Treasury secretary, Roger Altman, conceded in Senate testimony.

And Clinton admitted Wednesday for the first time that he will have to “revisit” his plan for a middle-class tax cut. “I have to put everything back on the table,” he said in an interview with Arkansas reporters, citing new projections that show the deficit outlook has worsened substantially since his campaign pledge was made a year ago.

Clinton has called for cutting the federal deficit by $145 billion a year by the time his term ends. In addition to his deficit goal, he has proposed an “investment agenda” of some $60 billion a year in new spending on education, training, high technology and other programs designed to improve the nation’s long-term economic health.

Those commitments have been complicated by the worsening deficit outlook. Last week, President Bush issued a final federal budget that projected a 1997 shortfall of $305 billion, roughly $68 billion more than the Administration had estimated only six months earlier.

Making room in the budget for Clinton’s new spending programs while still reducing the deficit entails a combination of higher taxes and spending cuts in existing programs that could total as much as $200 billion annually by the end of Clinton’s term, advisers conceded.

“Nothing has been decided,” said one top aide, “but those numbers are valid.”

Such changes in taxes and spending would easily exceed the scale of the 1990 budget agreement painfully negotiated by the Bush White House and congressional Democrats. That agreement, which led Bush to violate his “no new taxes” campaign pledge, provided for roughly $500 billion in tax increases and budget cuts spread over four years.

For days, Clinton’s top advisers have been hinting at the possibility that the President-elect may be forced to scale back some of his campaign proposals, such as the middle-class tax cut. Their statements are part of a carefully coordinated campaign designed to prepare public opinion for the bitter medicine that their economic plan is likely to contain.

“We have to make sure that people understand that the new deficit figures released last week lead us to a new world,” said Clinton communications director George Stephanopoulos. The goal, he added, is to give voters “a deeper understanding of the trade-offs and decisions we have to make.”

Aides emphasized that Clinton has not yet decided on a final target figure for his budget, let alone on specific policy choices, such as how much of his plan will consist of tax increases as opposed to spending cuts, or which programs to subject to the budgetary knife. The President-elect also has proposed raising taxes on the wealthy, although revenue raised in that way would be unlikely to make much of a dent in the ballooning deficits.

Clinton once had hoped to have unveiled his economic plan by his inauguration. But the President-elect now expects that it will not be ready for at least another month, aides said, and he is expected to ask Congress for an extension of the Feb. 1 deadline for submitting his first budget.

The range of options for making spending reductions of the magnitude under discussion is limited and all involve at least tinkering with popular entitlement programs, such as Medicare, Social Security, veterans benefits and agricultural price supports.

Entitlement programs, which provide specified benefits to all who qualify, are not subject to the annual congressional appropriation process and have been among the biggest contributors to the stubbornly high deficits of recent years. Soaring health care costs, in particular, have caused Medicare and Medicaid outlays to rise dramatically.

Past efforts to contain entitlement spending have provoked intense political opposition from the elderly, who are among the biggest beneficiaries of existing programs.

Richard G. Darman, current director of the Office of Management and Budget, had proposed a cap on spending for entitlements that would have reduced the budget by about $117 billion by the time it was fully effective in 1997. But Bush shied away from the political implications of the plan, and never pushed it.

During the campaign, Clinton used the Darman plan as an issue from time to time, saying that Bush would have cut major benefit programs if he had been reelected.

Now Clinton may have to do that himself. Avoiding doing so would probably require either drastically scaling back his own new spending plans or abandoning hopes for substantial deficit reduction. And neither of those options appeals to the President-elect.

“He’s still very committed to the core of his investment agenda,” said Gene Sperling, deputy director of economic policy for Clinton’s transition.

At least some evidence indicates that the public now is more receptive to the prospect of painful deficit-cutting measures than it has been in years past. That may reflect the strong emphasis placed on the dangers the deficit poses for the economy by independent presidential candidate Ross Perot during the presidential campaign.

A new poll to be released today shows that voters are far more concerned about the deficit than at any time in the last decade. “It’s moved from a phony problem to a real problem in voters’ minds,” said pollster Celinda Lake.

And virtually all of the rhetoric from the Clinton team during the last week has emphasized the importance of deficit reduction.

Alice Rivlin, Clinton’s nominee to be deputy director of the Office of Management and Budget, took her turn at making that case during Senate confirmation testimony Wednesday. “We have to stop living beyond our means,” she told the Senate Governmental Affairs Committee. “In the end, everybody will have to give up something. We’ll have to have shared sacrifice to solve this problem.”

Rivlin’s language recalled the campaign trail pronouncements of Perot, who insisted that addressing the deficit problem would require “fair, shared sacrifice” by the American people.

Altman, Clinton’s choice for deputy Treasury secretary, sounded a similar theme in testimony before the Senate Finance Committee, saying that he would favor enactment of a consumption tax, such as a national sales tax or a higher gasoline tax, as part of a plan to reduce the deficit.

“As a nation, we have been consuming too much and investing too little,” Altman said. “We need to move away from that and toward higher levels of investment. I do think that one form or another of a new tax on consumption is necessary.”

Altman testified that the new Administration intends to propose “some stimulus now” to try to speed up the sluggish economy and create jobs. But the Wall Street investment banker indicated that the stimulus program will be relatively small.

Like Rivlin, Altman said that reducing the deficit would require cuts in some entitlement programs, such as Medicare, Medicaid, Social Security and various welfare and pension programs. But he declined to specify which benefits he would recommend curbing. He noted, however, that it will be impossible to solve the deficit problem “without some change in the rate in the growth of entitlements.”