White House Sees Sluggish Growth : Economy: Administration drops target for the year to 2% from 3.1% and predicts slow activity for the next four years. But it anticipates a much smaller budget deficit.

The Clinton Administration sharply lowered its forecast for economic growth Wednesday, dropping this year’s target to 2% from 3.1% and predicting that the economy will be stuck in low gear for the next four years.

But in its midyear economic and budget review, the White House also said the federal deficit will be much smaller next year than previously anticipated, falling to $259.4 billion, or roughly $45.9 billion less than the official estimate issued last spring. The improving deficit outlook reflects declining interest rates, reduced savings-and-loan bailout costs and updated estimates of the effect of Clinton’s new budget plan on federal revenues and spending.

The Administration now predicts that the Clinton program will curb the deficit by a total of $504.8 billion over five years. The deficit will fall back to less than $200 billion by 1996, the White House said, resulting in lower interest rates and less inflation than would prevail otherwise.

Leon E. Panetta, director of the White House Office of Management and Budget, emphasized that “without action on the economic plan, we were looking at deficits that would have ranged anywhere from $300 billion to $400 billion over the next five years. With the enactment of this economic plan, the President and Congress have taken a major step in controlling deficits in this country. It’s a first step but it’s a major step.”

Although those deficit projections are welcome given the nation’s economic doldrums, the new forecast for growth is less encouraging--particularly for an Administration boosted to power by a presidential campaign that dwelt on the economy and whose officials concede that it will be judged largely on its ability to foster economic expansion and create jobs.

The revised forecast came one day after the government changed its report on economic performance in 1992, showing that growth surged to 5.7% in the fourth quarter, a full percentage point higher than previously estimated for the final months of the George Bush Administration.

Though the new Administration, which is scarcely seven months old, has had little time to influence the economy, the two days of economic reports indicate that the nation’s fortunes were higher in the final year of the Bush presidency and are headed for a slower recovery under Clinton than previously believed.

The Administration’s forecast of weaker economic and job growth also raises questions about whether the new deficit targets can actually be met. Slow growth and stagnant employment levels could lead to higher federal spending on such mandatory programs as unemployment insurance and welfare--the same factors that caused the Bush Administration to miss its deficit targets repeatedly.

The Administration predicted that economic growth will rise to about 3% for the second half of 1993, stay there in 1994 and then decline to 2.7% in 1995 and 1996. The jobless rate, it forecast, will not fall below 6% before 1996.

Laura D’Andrea Tyson, who chairs the White House Council of Economic Advisers, said that the latest report is a “cautious forecast” and that the Administration could be pleasantly surprised by faster growth than it anticipates. She conceded in a briefing with reporters, however, that such modest rates of economic growth will not give much impetus to job creation anytime soon.

Administration officials have argued that part of the problem last year was that the higher economic growth was not accompanied by fast job growth. Instead, there was a lag between growth and job creation.

Since November’s election, about 1 million new jobs have been generated. Clinton has taken credit for those jobs, though Administration officials now acknowledge that they were brought on by economic growth generated under Bush.

“In 1992, there was an awful lot of economic growth and not much in the way of job gains, and in 1993 we are seeing an awful lot of job gains for rather meager levels of economic growth,” observed Alan Blinder, a White House economist. “I think you have to look at the two years as one piece and see that there has been a lag between output and jobs.”

The only stimulative impact from Clinton’s budget, officials said, will come from further declines in long-term interest rates. The Administration forecasts that interest rates will stay near their current very low levels throughout most of the 1990s, fueling a recovery led by consumers and businesses that have cleaned up their balance sheets by refinancing high-cost debt left over from the 1980s.

Low interest rates also will cut federal borrowing costs, reinforcing Clinton’s drive for deficit reduction. Interest rate reductions account for at least one-fourth of the savings in the Administration’s revised deficit forecasts for 1998.

The Administration now predicts that interest rates on 10-year Treasury notes will stay below 6% until at least 1998, and Tyson insisted Wednesday that there is no evidence to suggest that either interest rates or inflation will rise in the foreseeable future.

Yet the midyear review acknowledges that private economists are not so sure rates will remain so low for so long. The latest forecast by the Blue Chip newsletter, a survey of the nation’s leading economists, calls for 10-year rates to rise to 7.6% by 1996, 1.7 percentage points higher than Clinton’s forecast. If rates do rise that quickly, the economic benefits from Clinton’s budget could be seriously undermined.

For 1993, the White House now projects a deficit of $285.3 billion, down from $309.7 billion estimated in April. The new forecast calls for the deficit to decline more rapidly in future years: It would fall to $259.4 billion in 1994, $200.4 billion in 1995 and $179 billion in 1996. It then would rise to $184.3 billion in 1997 and $181 billion in 1998.

Panetta said the Administration plans to seek further spending cuts in October to live up to Clinton’s promise to key lawmakers during this summer’s budget negotiations. To win critical votes in his drive for passage of the budget, Clinton pledged to conservative Democrats that he would push for bigger spending cuts and would campaign for new budget enforcement measures.

Panetta said the White House believes that it may be able to lock in an extra $10 billion to $15 billion in savings once the appropriations bills are finished moving through Congress. He also indicated that the White House is studying ways to wring greater savings out of Medicare and Medicaid to help finance the Administration’s pending health care reform package.

Administration sources hope to reap $17 billion to $22 billion annually from sharp reductions in federal payments to hospitals that provide a disproportionate share of uncompensated care. In addition, senior health policy analysts project annual Medicaid savings of at least $13 billion.

Times staff writer Edwin Chen contributed to this story.