Budget-Cutting Becomes a Blood Sport : Government: Both parties are out to drastically slash federal spending and taxes. Democrats now tout once-unthinkable plans.

A year ago, when an obscure Ohio Republican lawmaker crafted a bipartisan congressional coalition to support steep federal spending cuts that went far beyond those called for by the Clinton Administration, the White House narrowly defeated the plan.

President Clinton and his advisers argued that the Clinton budget was already so austere that further cuts would slow the economy. The White House was also so committed to increased spending for certain “public investments”--such as job training, education and public housing--that the Administration didn’t believe it was possible to meet Clinton’s pledge to provide tax relief for middle-class Americans.

Today, however, that obscure Republican, Rep. John R. Kasich, is poised to become chairman of the House Budget Committee. And Clinton is scrambling to develop a new, more conservative approach to governing to match the tax cuts and spending reductions Kasich and his party hope to enact.

Indeed, Kasich’s rise to power is symbolic of the change that has hit Washington. Republicans and Democrats alike now are contemplating proposals to alter economic and budget policy that would have been unthinkable just a few months ago.

The Republican sweep in the November elections has convinced both sides that a new political consensus has emerged in favor of harsh spending cuts, sweeping tax reductions and a diminishment of the role the federal government plays in society.

That new conservative mood was captured clearly Friday by Sen. Bob Kerrey (D-Neb.) as he proposed a package of deficit-cutting measures--including cutting Social Security taxes, requiring workers to open private retirement accounts and raising the age for full retirement and Medicare benefits to 70--during a public debate at the Bipartisan Commission on Entitlement and Tax Reform.

Kerrey made it clear that he believes Americans are ready for tough measures. “We have an obligation to ourselves, our children and future generations to leave them a nation whose fiscal and economic health gives them an opportunity to pursue their dreams. We have to bring entitlement spending into balance.”

The Clinton Administration finds itself open to such thinking as well.

“The President has made it clear that he wants bold measures” presented to him in the budget process, a senior Administration official said. As a result, officials say Clinton is finally poised to approve a modest middle-class tax cut, paid for through new spending cutbacks and restructuring in federal departments.

If Clinton does announce such a tax cut, it will be done with offsetting spending cuts so as not to worsen the budget deficit, Administration officials stressed. The Administration has not yet decided the exact size or form of its tax break, but officials say they are likely to propose cuts of about $30 billion targeted for working families with children.

The Administration is also scouring the government for some highly visible programs or agencies to eliminate or consolidate--steps that would steal some thunder from the Republicans.

While Administration officials dismiss reports that a large Cabinet department like Housing and Urban Development might be broken up, other sources suggest that smaller agencies, like the Interstate Commerce Commission, might be targeted for elimination.

Such actions would come in addition to the Administration’s ongoing Reinventing Government program, which already calls for the elimination of 272,000 federal jobs. So far, about 75,000 of that number have been cut.

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Still, the coming budget plan--to be unveiled by the White House in February--will be the least significant of the three issued so far by the Clinton Administration because the Republican-controlled Congress plans to reject it in favor of its own tax and spending blueprints.

Still, the Clinton budget retains at least symbolic importance as an indicator of Clinton’s goals. “The President wants us to develop an agenda that we believe is right, one that is an expression of our beliefs,” even if the Republicans ignore it, one Administration official noted.

In the House, Republicans are committed to vote instead for their “contract with America,” which calls for at least $147 billion in tax cuts over five years, partially financed with at least $40 billion in reductions in welfare and related poverty programs.

The most significant cuts are a 50% reduction in the capital gains tax rate, plus a plan to index capital gains for inflation and a proposal for a $500-per-child tax credit for middle-class families. The Republicans’ middle-class tax cut will almost certainly turn out to be larger than the one Clinton will propose.

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The “contract with America” itself does not include enough spending cuts to either pay for its tax cuts or comply with the requirements of the contract’s proposal for a constitutional amendment to balance the budget. But Kasich is privately developing a new Republican alternative budget that will include specific spending cuts.

The starting point for that effort comes from Kasich’s plan, introduced last March, to reduce federal spending by $150 billion more over five years than Clinton had proposed. In addition to cuts in welfare, Medicaid and other poverty programs, that Kasich plan also proposed reductions or vast changes in a wide range of programs that are popular with the middle class, farmers and powerful senior citizen groups--such as Medicare, agriculture subsidies, Amtrak funding and small business and housing loans.

Funding for virtually all of Clinton’s so-called “investment” agenda would be either scaled back or eliminated.

But as the Republicans search for enough spending cuts to pay for their own agenda, senior Administration officials are bemused to see them considering the same cuts that the White House pondered last year--and ultimately abandoned for lack of Republican support.

“Many of the things they are now considering are things that we considered including in the Reinventing Government plan, but we decided not to include because we couldn’t find any Republicans who would join us to endorse them,” noted Laura D’Andrea Tyson, head of the Council of Economic Advisers at the White House.