President Demands Credit for Cutting Federal Deficit : Economy: Clinton cites $87-billion drop in two years to $203 billion as steepest in the nation’s history and proof that economic plan is working.

With Election Day looming, President Clinton on Monday seized on news of a further drop in the federal deficit to demand that his Administration receive more credit for its economic record.

Clinton said that preliminary estimates for fiscal 1994 show the deficit shrinking to $203 billion, down from $290.4 billion in 1992, and headed for a projected $167.1 billion in the next fiscal year, which began Oct. 1. The decline is the largest two-year drop in U.S. history, Clinton said, contending that it proves critics’ predictions about the dangers of his Administration’s economic course have been exaggerated.

When his five-year budget was enacted in 1993, critics predicted that “the economy will collapse, the deficit will explode, middle-class taxpayers will be bankrupt--this will be the end of the world,” Clinton said in a speech to the City Club of Cleveland.

Instead, he contended, the economy’s growth and the deficit’s decline show that “we are on the right course, and we should continue in this direction.”

But his upbeat economic message was detoured during a partisan exchange with Rep. Martin R. Hoke (R-Ohio). Clinton took questions from club members who had been chosen by lottery from the audience. By chance, the first one came from Hoke, who demanded to know how Clinton could jokingly describe the Republicans’ election-year platform, called a “contract with America” as a “contract on America.”

Such a joke, Hoke said, made light of violence at a time when crime is a growing concern to all Americans. Bristling, he said Clinton’s implication “that I would take out a contract on my constituents is a suggestion I take very, very personally.”

Clinton tried to quiet the crowd long enough to allow Hoke to be heard. But Clinton then ran through his objections to the Republican program of tax cuts, government cutbacks and military spending hikes, before closing by saying that although he appreciated Hoke’s concern about violence, “I wish you hadn’t voted against the Brady Bill (which provides for a waiting period for the purchase of handguns) and the crime bill.”

Clinton’s supporters in the audience answered with thunderous applause.

The deficit news offers Clinton a useful opportunity to assert again that much of his economic record has been overlooked. But it also points to the dilemma Clinton is facing as federal agencies consider the Administration’s fiscal course for the next year.

The success of deficit reduction could encourage some citizens to ask for further reductions but the increasing costs of Medicare, Medicaid and other entitlement spending would make that more difficult. Yet, the election year has demonstrated there is also growing pressure for tax cuts--including the kind of middle-class tax decrease that Clinton made a key plank early in his 1992 campaign.

Clinton also wants to increase domestic spending--what he calls investment--in programs that were largely ignored by Congress in the President’s first year. The White House in particular would like to increase spending for education and training, including the Head Start programs and other efforts for poor children, as well as increased spending to build roads and bridges.

“There’s going to be a lot of pressure from all directions and I just don’t know how he’s going to resolve it,” said Gary Bass, a budget specialist at OMB Watch, a liberal publication that focuses on the budget, in Washington, D.C.

The growing importance of this issue was apparent over the weekend, with disclosure of a memo written by Alice Rivlin, director of the Office of Management and Budget, that pointed out the possibilities of cuts in Medicare and Social Security spending. Administration officials hastened to play down the memo, arguing that it represented a catalogue of possibilities that are not necessarily under consideration.

Nonetheless, there are clearly many within the Administration who believe that the expected growth in entitlement spending needs to be headed off before it causes the deficit to climb again at the end of the century. Not only Rivlin, but Chief of Staff Leon E. Panetta, whose influence has been rising, are hard-line deficit hawks.

Some outside analysts believe that Administration officials will take a keen look at broad-based consumption taxes or limits on how much Americans with upper incomes can receive in entitlement programs. Bass said Clinton might find it politically appealing to propose that Congress pass a middle-class tax reduction twinned with cuts in tax breaks affecting corporations.

Meanwhile, the Republicans have lost no opportunity to suggest that the Democrats will respond to new demands for federal spending by raising taxes. Rep. Newt Gingrich (R-Ga.), the House minority whip, told an NBC interviewer that Clinton has not ruled out a “massive tax increase,” or, for example, capping the home mortgage deduction.

Administration aides said the federal deficit reductions under Clinton are attributable to a combination of increased taxes (including a Clinton-proposed tax on wealthier taxpayers), the overall improvement in the economy and the effects of federal spending caps. They said that while the reductions had been in view for some time, it was important to talk about them because of the public’s understandable skepticism about claims that the deficit is dropping.

But working against smaller deficits are steadily rising federal health care costs--including Medicare, Medicaid and veterans’ health programs--which are forecast to increase by about 10% a year for the next decade.

In defending his economic record, Clinton called it remarkable that the Administration not only had cut the deficit and helped spur the economy but that at the same time “we have actually been able to increase our investment in education and training and technology.” He pointed to the Head Start and high school apprenticeship programs, the expanded college loan program and efforts to find new functions for companies that have manufactured weapons.

Clinton also took credit for a recent optimistic economic sign--growth in the number of better-paying jobs. He said that more than half the new jobs created this year are above the average wage and that these exceed the number of better-paying jobs created in the last five years.

In an interview earlier Monday with WWWE radio in Cleveland, Clinton tried to dampen expectations of what he may accomplish on his five-day Middle East trip that begins today.

“I don’t expect a dramatic breakthrough” in talks with Syria’s leader, Hafez Assad, he said.

In Ohio, Clinton also appeared at fund-raisers for Lee Fisher, the Democratic candidate for attorney general, and for Rep. Thomas C. Sawyer (D-Ohio).