2002 Deadline Lends Focus to Congress’ Goal of Balancing Books, Backers Assert : Budget: But the seven-year plan to erase the national deficit could also mean too many cuts too soon and could slow the economy, experts say.

As Congress pushes ahead with a budgetary revolution, the distant year of 2002 has become just about everybody’s deadline for setting straight the nation’s books after a quarter-century of red ink.

The deadline, ratified by the House this week, is driving the size, the pace and even the nature of spending cuts needed for the mammoth task. In the short run, a seven-year plan to vanquish the deficit could slow the economy’s growth, economists cautioned. Yet the choice of that year, budget experts agreed, has little to do with sound government management or economic policy.

“It’s basically just too rapid a deficit reduction,” Alice Rivlin, director of the White House Office of Management and Budget, cautioned in a television interview Friday. “We think there should be deficit reduction, but not that fast and not at the cost of programs that people really need.”

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Although the 2002 deadline is not set in stone--Congress could extend it at any time in the future--the House agreed Thursday to aim for that year. The Senate Budget Committee included the same deadline in the budget that the full Senate is expected to adopt next week. The Senate voted 99 to 0 on Friday to reject Clinton’s own budget proposal, which would leave the deficit at $200 billion, near its current level, for at least five years.

While the House and Senate disagree on taxes, with the Senate assigning a lower priority to tax cuts, the two chambers do agree on what may be the most important element of all: getting the job done by 2002.

The timetable is no minor detail. It gets to the heart of how the nation would experience a wrenching shift in fiscal policy. A longer schedule would allow for more gradual shifts in spending and ease the disruptions that may be in store for many Americans. A shorter time frame would require steeper cuts and pose greater risks to the economy.

“There’s nothing magical about 2002,” said Lawrence Chimerine, chief economist at the Economic Strategy Institute in Washington. “How do we know what conditions are going to be like in 2002? How do we know what our military needs might be? How do we know whether we’re going to have a recession?”

“I’d actually like to know why they picked 2002,” said David B. Bostian, chief economist for the Herzog, Heine, Geduld investment firm in New York.

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That Congress has chosen a deadline at all reflects a conviction that, without one, there would be nothing to propel its members to make the tough spending cuts necessary to stem the tide of red ink.

Two years ago, Sen. Paul Simon (D-Ill.) proposed taking seven years or more to balance the budget, a schedule that became part of the balanced-budget amendment that fell short of the two-thirds majority needed to pass the Senate in March.

“I think there has to be some kind of reasonable time guideline--otherwise it’s never going to be done,” Simon said in an interview.

One reason the choice of a deadline is so critical is that it may make the difference between recession and recovery, as a thriftier government cuts back on payments that formerly rained down on highways, education, farms and other beneficiaries of federal largess.

Many economists believe that the economy can continue to grow despite the cutbacks necessary to meet a 2002 deadline. Federal Reserve Board policies on interest rates are seen as critical, with lower rates needed to stimulate the economy as government spending slows down.

The shorter the time frame, however, the greater the risk for the recovery and the narrower the margin of error for the Federal Reserve. “It could be 2001. It could be 2003,” said Ross C. DeVol, an economist with the WEFA Group in suburban Philadelphia. “The idea is you don’t want to eliminate the federal budget deficit too quickly.”

“You can make a case that 2002 is too fast,” Chimerine said, contending that proposed cuts in education and training actually could undermine the economy’s long-term potential.

In any case, meeting the deadline depends on assumptions that interest rates will fall, inflation stays moderate and the nation manages to avoid a serious recession. It also is an exercise in deferred gratification, a far cry from government practices that dug the fiscal hole in the first place.

As some experts see it, the payoff for balancing the budget is a long-term one, with the nation’s future prosperity rising as more of the wealth is used for productive investment. Between 1996 and 2002, beneficiaries of spending programs would pay a price.

“In the short run, there’s no question that it will be disruptive to certain segments of society,” said Mickey D. Levy, chief financial economist with NationsBank in New York. But in the long run it’s an unambiguous plus.”

A benefit of having a deadline for the task, whether it is 2002 or another year, is that it would give an aura of credibility to budget-balancing claims. And such credibility is crucial if Americans are to receive the lower interest rates that are being promised as one of the payoffs of the difficult adjustment.

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Early in the Clinton Administration, a time when the financial world came to believe that the White House wanted to reduce the deficit, long-term interest rates fell from more than 7.6% to less than 6%, recalled David M. Jones, chief economist with Aubrey G. Lanston & Co. in New York. “It was quite impressive,” Jones said.

“A target year,” he noted, “makes the plan more credible and believable.”

Economists hasten to add that such rewards are not linked to balancing the budget in 2002 as opposed to any other year in the foreseeable future, say between 2000 and 2010. But many budget experts believe that having some date imposes a sense of order on what has been a disorderly budget process with insufficient discipline to make sure that spending desires match income realities.

“There’s a sense that if you’re committed to a zero deficit, you’re keeping the process from running away from you,” said Joel L. Prakken, an economist with Laurence H. Meyer & Associates in St. Louis. “I think in a way that’s the bottom line.”