Health Care Issues May Thwart Goals on Deficit : Economy: Unresolved policy on entitlements may cause Clinton’s target for reduction to fall short, aides say.

The economic program that President Clinton unveils next month may fall well short of his stated goal of reducing the federal deficit by $145 billion a year by 1997, Administration sources said Friday, because of problems in drafting a plan for health care reform and medical cost containment.

The President will present his economic blueprint in his first State of the Union address, set for Feb. 17. But aides say the plan may not meet his deficit reduction target unless the Administration also commits itself to significant cuts in popular health care entitlement programs such as Medicare.

And even if the President is willing to take such a step, designing the health care package is taking so long that he faces a political bind anyway.

The decision on whether or not to propose curbs on health care entitlements may come within the next few days, sources said.

But in an effort to defer a potential political backlash, the Administration may wait to detail any unpopular Medicare restrictions until May. That is when the Administration expects to have finished the reform package that is to provide access to the health care system for those who are now uninsured, fulfilling one of Clinton’s central campaign pledges.

The Catch-22 political problem for Clinton is that he is reluctant to announce the bad news on health care--restrictions on Medicare--months before he can unveil the expected good news--reform of the existing system and universal access for the 36 million uninsured Americans.

Yet without savings from health care curbs, officials say, it will be difficult for the Administration to meet the President’s deficit reduction targets in the February blueprint.

Today, mandatory spending, or entitlement, programs account for roughly half of the federal budget. Social Security, Medicare and Medicaid account for most of such entitlement spending.

Since his election in November, Clinton has backed away from his promise to cut the federal deficit in half in four years, contending that the deficit is much worse than he expected. Yet he has continued to insist that he can cut the deficit by $145 billion a year by the end of his first term in office.

Leon E. Panetta, director of the Office of Management and Budget, signaled Friday that Clinton will not attempt to hide such problems in the Administration’s first budget. Speaking at an annual winter retreat of House Democrats in Baltimore, Panetta said that “there can be no smoke and mirrors. We have to shoot straight with the American people.”

But to prove it is serious about deficit reduction without immediately hitting health care, the Administration may include some politically daring steps aimed at the nation’s 36 million Social Security beneficiaries in the economic program it is to announce next month. Administration officials are seriously considering deferring the annual cost of living increase for some beneficiaries and subjecting more Social Security benefits to taxes.

Both the COLA deferral and the higher taxes may be limited to relatively affluent recipients, Administration officials said.

But such benefit cuts would spark a tremendous battle between the Administration and the powerful senior citizen lobby, including the 35 million-member American Assn. of Retired Persons. Similar efforts during the Ronald Reagan Administration were easily defeated and cost the Republican Party heavily in Senate and House races, especially in 1982 and 1986.

Meanwhile, another senior Administration official said Clinton plans to propose a short-term economic recovery program that includes $15 billion in new spending and $5 billion to $7 billion in tax cuts for business.

Deputy Treasury Secretary Roger Altman said the stimulus plan will include a small investment tax credit and a capital gains tax cut aimed primarily at small businesses, two proposals that Clinton advocated during the presidential campaign. He added that, as part of its short-term stimulus plan, the Clinton Administration will look for new ways to ease the regulatory burden on banks, in order to give bankers new incentives to lend money to consumers and businesses, and thus end the credit crunch.

Panetta told House Democrats in Baltimore that the Administration will seek to get its short-term spending into the economy more rapidly through an emergency jobs program designed to put people to work by summer.

Earlier, Speaker Thomas S. Foley (D-Wash.) said he expected the Administration to propose a declaration of emergency to get around spending ceilings in the current Budget Enforcement Act and to ask for about $15 billion to finance the jobs program. The Administration is leaning toward a targeted program, related to long-term investments in roads, bridges and other public works, that could be passed by Congress quickly and take effect within six months or less.

“We should limit the votes that have to be cast . . . and move it as quickly as we can. We have a short window of opportunity,” Panetta said.

He added that the latest government data showing that the economy grew by 3.8% in the fourth quarter was welcome, but still left much to be done to restore genuine economic health.

“We have a continuing weak economy on our hands,” Panetta said. “There are continuing layoffs, a continuing defense build-down, and 16 million people are unemployed or underemployed. The credit crunch is still real.”

Altman made it clear that a middle-class tax cut--promised by Clinton during the campaign--will not be included in the short-term recovery program.

During the presidential race, Clinton said he would cut taxes for the middle class by a total of $60 billion over four years; he added that he would not increase any taxes that would hit the middle class in order to pay for his programs.

But Altman confirmed that the Administration is also studying two types of broad energy taxes: One option is a national sales tax on all forms of energy usage, and another is a so-called BTU tax, which taxes all forms of energy by the level of their energy content.