NEWS ANALYSIS : White House Grapples With Reality of Sticking to Budget : Government: Agencies say they cannot function under ‘hard freeze’ deal struck with Congress. And Clinton seeks deeper cuts to pay for domestic initiatives.

President Clinton frequently cites worker retraining as the key to revitalizing the U.S. economy and has pledged to pour billions of dollars into new programs to aid the unemployed.

But the White House has told Labor Secretary Robert B. Reich to scale back his main initiative for retraining displaced workers, and Reich plans to go to the Oval Office next week to ask for more funds.

It is becoming a well-worn path. Secretary of State Warren Christopher already has complained about reductions in foreign aid. Commerce Secretary Ronald H. Brown tried to head off cutbacks in technology and environmental initiatives. Brian Atwood, administrator of the Agency for International Development, angered the White House by publicly criticizing steep cuts in aid to Latin America and Asia. Officials at other agencies also are complaining.

As Clinton and his senior aides come to grips with next year’s federal budget, the process is proving unexpectedly painful. For the first time, the White House is confronting the consequences of the Administration’s five-year, $500-billion deficit reduction plan on some of Clinton’s cherished domestic spending initiatives.

As the price of winning approval of his first budget, Clinton accepted a congressional proposal to freeze most domestic spending. But, unwilling to abandon his public investment agenda entirely, he has asked every Cabinet department to cut back even more so that he can find room for a few new programs.

The resulting squeeze is producing howls of protest from some quarters.

“This is a new era,” said Leon E. Panetta, director of the White House Office of Management and Budget. “Today, every new program and every reform effort is going to be measured by how you pay for it. It isn’t enough to propose the reform. You also have to decide the politics of where you go for the funding.”

Throughout his first year in office, Clinton has been characterized by conservative critics as little more than a tax-and-spend liberal. But in fact, the President’s deficit reduction commitments are forcing him to jettison much of the domestic spending agenda he talked up during last year’s campaign.

None of the choices is very palatable for a President who was elected on a platform of job creation, economic growth and renewed emphasis on the nation’s domestic ills. Clinton held out hope all year that he would be able to pursue his growth agenda and tackle the budget deficit at the same time, even though the goals are to some extent contradictory.

But that was never a very realistic strategy given the size of the budget deficit, which weighed in at $285 billion last year and is expected to hover around the $200-billion mark for years to come. Sensing the Administration’s ambivalence, Congress stepped in and made sure that deficit reduction would assume top priority. With zealous freshman lawmakers leading the way, it wrote into law spending caps that are considerably tighter than the targets contained in Clinton’s original five-year economic plan.

The real crunch is attributable to a “hard freeze” on discretionary spending, a category that includes everything in the budget except entitlement programs like Medicare and Medicaid and other mandatory spending like interest on the debt.

Unlike past “freezes,” which allowed agency budgets to rise with inflation, this one is the real thing: Total discretionary domestic spending must stay the same in absolute dollars, starting with the 1995 fiscal year that begins next Oct. 1. The freeze will last until fiscal 1998.

The constraints are more severe than those faced by Clinton’s recent predecessors. By the end of Clinton’s first term, in fact, spending on key domestic programs will almost certainly fall short of the levels set during the more conservative George Bush Administration, after adjusting for inflation.

The problem is exacerbated by Clinton’s determination to find room for at least a few of his new spending initiatives. Under the budget rules, the only way he can obtain funds for new or expanded programs is to force reductions elsewhere.

Clinton’s grim reaper in this process is Panetta, a former congressional budget expert and a confirmed deficit hawk. Last summer, Panetta foresaw the looming budgetary squeeze and told every agency to plan for 10% budget reductions in areas that were not part of Clinton’s high-priority “public investment” agenda.

Some agencies dutifully took an initial whack at their budgets. Treasury, for instance, signaled its willingness to abandon the Customs Service’s air and marine drug interdiction program along the border.

Yet so far, executive agencies have not stepped forward with enough voluntary reductions to satisfy Panetta’s mandate.

But Panetta, a gregarious former congressman from Northern California, has turned tough guy in order to bridge the gap. So the budget director and his staff are making their own recommendations, and some departments have been stunned by the results.

“Very few departments focused on the reality of the hard freeze,” Panetta said. “Now that reality is beginning to hit home. It isn’t as if you can find a lot of magic, or even gimmicks. Most of those gimmicks have been used up.”

The initial agency budgets exceeded Panetta’s target by a total of about $20 billion; the effect of inflation and congressionally mandated pay raises boosted that by another $10 billion. Faced with a Christmas deadline for final decisions, the President and his staff already have whittled the excess spending down to about $10 billion, but many of the choices they are making are causing a firestorm of protest within the Administration.

Congress made Clinton’s task even more difficult by demanding that he cut the federal labor force by 100,000 positions by the end of the 1995 fiscal year, the first installment in a five-year plan to eliminate 252,000 federal jobs.

The pain has prompted almost every Cabinet secretary to complain directly to the President about his or her ration of shared sacrifice.

“The caps are horrendous; they are a terrific constraint,” a senior Education Department official said. “But in the long run, we all have to live within them, so it all becomes a zero-sum game throughout the Administration. Everybody is going to scale back from the (budget) numbers we think we ought to do.”

Yet even with the 10% cuts, Clinton still can’t make room for all of his top priorities. They include “children’s initiatives” such as Head Start and child nutrition, technology and science projects such as the “information highway” and job training and defense conversion programs. The latter are key elements of Clinton’s efforts to aid California.

In an interview with The Times last Saturday, Clinton expressed frustration at the tight budget constraints and the limits they have imposed on his ability to mount an investment program that could help California and the rest of the nation. “We are going to bring this deficit down, we’re going to do it in a strict way, but we have got to have some money to invest if we want to create some jobs,” Clinton said.

Last spring, Clinton proposed spending $29.4 billion on new “public investments” in 1995, but the budgetary squeeze is forcing him to cut those plans nearly in half. Clinton’s goal of spending $100 billion on new investments over five years seems out of reach.

“The President has decided there are some very important investments he wants to focus on,” Panetta acknowledged. Even so, he added, the investment package will be a good deal smaller than was first projected in February.

The 1995 installment will be “in the same vicinity” as the $16 billion proposed by the Administration for the 1994 budget, Panetta said. Congress cut the 1994 program down to about $12 billion, and next year’s package seems unlikely to emerge unscathed.

The hard freeze will make it nearly impossible for key programs to make up the ground they lost in last summer’s congressional budget-cutting process. For example, the Administration proposed spending about $400 million during fiscal 1994 on Goals 2000, the education reform effort sponsored by Education Secretary Richard W. Riley; Congress cut the program to about $110 million. Yet after Riley met with Clinton late last week, Education Department officials were uncertain whether the White House would even agree to fully fund their initial 1995 request, let alone make up the loss suffered in 1994.

Since the freeze is scheduled to continue until 1998, Panetta is cracking down on efforts by some agencies to propose initiatives that would grow rapidly in future years. At the Labor Department, for example, Reich has proposed spending $1.3 billion in 1995 on the displaced worker program, which is designed to consolidate several smaller retraining efforts into one expanded nationwide initiative. By 1998, Labor wants to spend $3.5 billion on the program.

But Panetta and his White House budget aides say that’s too much.

“The big problem we’re having with OMB is over (future budget years),” one senior Labor Department official noted.

The issue of future obligations, Panetta warned, raises serious questions about the Administration’s ability to launch such high-profile initiatives as welfare reform, which probably would start small but grow rapidly over the course of Clinton’s term. Panetta said that he still is waiting for the White House to provide cost estimates for welfare reform, noting that it will have to be scaled back if it doesn’t pay for itself through offsetting cuts in existing programs.

The Pentagon, meanwhile, is waging its own war with OMB over the effect of the budget constraints on the defense budget. The Defense Department says it is about $50 billion short of what it needs over the next five years to pay for its post-Cold War strategy; Defense Secretary Les Aspin plans to see Clinton next week to fight for more funds.

Yet Panetta dismissed suggestions by some White House officials that the Administration should press Congress to lift the spending caps because official forecasts for the deficit have declined in recent months.

“It is important to keep this (deficit reduction agreement) on track for the economy, to ensure credibility in the financial markets,” Panetta said. “This is also a great opportunity to force us in government to set priorities and to make the choices that the American people expect us to make.”