Clinton Begins Cutting Federal Spending Plans : Budget: Domestic investment takes a back seat to deficit reduction. Congressional spending caps are cited.

President Clinton began scaling back federal spending proposals Monday as the White House acknowledged that its next budget will provide little or no growth in domestic “investments” such as public works, job training, education and children’s programs that were once at the heart of Clinton’s agenda.

Launching a weeklong process to complete his 1995 budget, Clinton spent more than three hours Monday meeting with top aides bearing grim fiscal projections. Although final decisions are not due until later this week, officials suggested that Clinton is siding with the Administration’s deficit hawks who want to force Cabinet agencies to reduce sharply the scope of their initiatives to comply with congressional spending limits.

When he makes his decisions, Clinton will be ending weeks of internal squabbling between Leon E. Panetta, director of the White House Office of Management and Budget, and the Administration’s agency heads, who have rebelled against Panetta’s orders to bring their proposed budgets in line with lower spending ceilings imposed by Congress.

“There have been fights over housing programs, fights over nutrition programs--there are no sacred programs getting exempted from cuts by the White House,” noted one lobbyist familiar with the process.

Except for Treasury Secretary Lloyd Bentsen, the Cabinet secretaries who objected previously to the proposed cuts were excluded from Monday’s deliberations, which were dominated by Panetta and National Economic Council Chairman Robert E. Rubin. Indeed, this week’s budget sessions seem certain to enhance Panetta’s power by signaling to the rest of the Administration that the President is committed to making deficit reduction his No. 1 priority, despite the impact on the rest of his domestic agenda.

“The (budget cuts) are a matter of concern, but we are putting an absolute emphasis on meeting the (spending) targets and cutting that deficit substantially, and it will not be easy bringing that about,” Bentsen said Monday.

Speaking to reporters, Bentsen acknowledged that the Administration’s yearlong shift in emphasis toward deficit reduction and away from spending for growth means that Washington must rely almost completely on the private sector’s response to lower interest rates to fuel the economy.

“The government has provided some additional incentives, but finally it gets back to private enterprise and what they do,” Bentsen said.

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Administration officials acknowledged that cutting the budget actually dampens economic activity unless it brings about the kind of rapid reductions in interest rates that have occurred this year.

But Laura D’Andrea Tyson, who chairs the White House Council of Economic Advisers, defended the Administration’s willingness to make deficit reduction the focus of its economic policies, arguing that the acceleration in economic growth in the last few months is almost entirely attributable to the rapid reduction in interest rates that came as a result of Clinton’s economic plan. That fact underscores the need for the Administration to not back off from deficit reduction, she added. “We have had to make some very tough choices in a quite inhospitable economic environment,” said Tyson. (But) I see the response of the financial markets . . . as a vote of confidence” in the Administration’s decision to focus on deficit reduction, she added.

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Yet as the President and his advisers begin making final decisions on next year’s spending plan, they are confronted with new figures suggesting that they will be able to devote less money to domestic needs than their Republican predecessors.

A new congressional study shows that domestic spending will decline under Clinton, when adjusted for inflation. In fact, roughly half of the gains in domestic programs achieved during the George Bush Administration will be given up during Clinton’s first term, according to projections by the House Democratic Study Group.

The study found that discretionary programs will be cut in inflation-adjusted terms by $68 billion, or 12.5% over five years, from the levels that would have been in place had Congress not imposed a spending limit through 1998.

As a result, federal domestic spending, as a share of the total economy, will decline from 3.8% of gross domestic product to 3.5%, reversing the upward trend of the Bush years. Budget experts said this means there will be less money available for the federal government to invest in the long-term health of the nation’s economy.

Equally worrisome to some experts, however, is the fact that the freeze affects programs such as road and bridge construction that have a long-term payoff for the economy. Mandatory spending on so-called “entitlement” programs such as Medicare, Medicaid and Social Security, which do little to enhance American productivity, will not be affected by the congressional caps. As a result, analysts said, the entitlements’ share of the federal budget will increase.

“This represents a disturbing trend away from spending on the long term and toward federal spending that does little more than pay today’s bills on consumption,” warned Scott Lilly, executive director of the House Democratic Study Group.

The budget cuts being considered by Clinton will be necessary to comply with lower spending ceilings imposed on the Administration under a five-year deficit reduction plan approved in August. Congress imposed what Panetta calls a “hard freeze” that leaves domestic spending virtually unchanged between 1995 and 1998.

Clinton and his senior advisers still believe strongly in the need to expand such critical initiatives as Head Start, job training for displaced workers and new technology and research projects to aid defense conversion in California.

But the White House has concluded there is no choice but to continue to make deficit reduction the top priority and has decided not to try to fight the congressional freeze.

This means that for every dollar the Administration wants to spend on its own initiatives, it must cut somewhere else. But the spending limits are so tight that even that is not enough. Last spring, Clinton proposed to spend about $30 billion in fiscal 1995, which begins next October, on his new investments; Panetta has cut that figure back to about $16 billion to meet the spending ceilings.

As a result, programs such as Head Start, low-income heating and food assistance and others that benefit poor families and children are not likely to receive the funding levels that Clinton promised in his first five-year budget blueprint in April.

“It comes down to the fact that very tough cuts are needed in existing programs if we are going to find money for the President’s priorities like technology and defense conversion, putting more police on the street and funding school reform,” noted one senior White House adviser Monday.

“The challenge here is finding enough cuts to make room in the budget for those things that the President cares deeply about,” the adviser said.