New Forecast Dims Budget Deal Hopes : Government: Congressional Budget Office projects an additional $135-billion reduction in the deficit. But the figures only underscore gap between GOP and Clinton.

The Congressional Budget Office on Monday issued a revised economic forecast that projects $135 billion in additional deficit reduction over seven years largely because of a stronger economy and lower interest rates, a projection that many had hoped would permit President Clinton and GOP congressional leaders to reach a budget agreement.

The new forecast, however, only underscored the big differences that continue to divide the two sides on how to balance the budget by 2002.

In a confusing and frustrating twist, these and other factors do not create more savings after the turn of the century, according to the budget office. Consequently, the CBO said, only the GOP’s plan--which calls for about $900 billion in cuts--would maintain a balanced budget after 2002. The Administration’s plan proposes cuts of about $465 billion over seven years.

“If the children thought sugarplums were dancing in their heads for Christmas, the sugarplums were sort of dashed based on what we heard in that meeting,” said Sen. J. James Exon (D-Neb.), senior Democrat on the Senate Budget Committee, after an hourlong briefing by CBO Director June O’Neill.

The two sides remain divided on the size of tax cuts, restrictions on Medicare and Medicaid, welfare reform and other issues that would have to be settled to reach a long-term budget deal. The White House called on Republicans to offer a revised budget proposal, just as the Administration did last week.

Republicans have said that they are planning to put forth a revised budget proposal taking into consideration the new CBO numbers but few details have been revealed.

An unusual degree of anticipation had preceded the CBO forecast, because it was expected to narrow the chasm between Congress and the White House on the amount of savings required to balance the budget by 2002. Republican leaders have insisted that CBO is the official scorekeeper of budget balancing plans and that White House negotiators rely on CBO data rather than their own.

But some analysts were disappointed that the $135 billion in savings over a seven-year period was not reflected in a much larger budget surplus projected for 2002.

Rather, the CBO said the GOP budget would, as previously expected, yield only a modest, $3-billion surplus in 2002. Lacking the windfall of a big surplus, as some had hoped, budget negotiators continue to face formidable policy differences. Moreover, budget officials warned that any added expenditures--such as the $135 billion--could push up interest expenses in the future.

“It’s typically Washington, isn’t it?” said House Budget Committee Chairman John R. Kasich (R-Ohio), of the confusing scenario. “No one can figure out what it’s all about.”

The forecast seemed to bridge in small measure some of the gap dividing the Administration and Congress on health care. For example, the GOP has proposed curbing the growth of Medicare by $270 billion. The president, however, has sought only $124 billion in limits. Similarly, Republicans have sought $163 billion in Medicaid curbs, while the White House has recommended $54 billion.

“It maybe freed up $50-60 billion that we could employ to reduce the hits on Medicare and Medicaid,” Exon said. “But that’s a long way from where we want to be.”

Congressional budget officials of both parties reaffirmed their desire to hash out a compromise when negotiations resume today, although the nature of such a compromise remained murky.

For their part, Administration officials spoke warily about the effect that the CBO forecast would have on the slow-moving budget negotiations.

Robert E. Rubin, the Treasury secretary, said that the new CBO number is “a first step . . . but I think you’ve got to see the specifics of their budget. . . . Then we can take a look and see how that revised budget lines up against the requirements of the [latest] continuing resolution.”

In arriving at its new forecast, CBO attempted to calculate how lower interest rates would lower borrowing costs for businesses, thereby boosting corporate profits--and tax revenues. Economists widely agree that reduced federal borrowing would lower interest rates, because the demand to borrow capital would significantly decline.

The budget office also amended past projections with an up-to-date view of slightly lower inflation and slower growth in the labor force. CBO also included a 0.2% reduction in federal cost-of-living adjustments after 1998, as the Bureau of Labor Statistics has recommended, and concluded that spending on Medicare and Medicaid would be less than previously thought.

White House officials questioned Monday whether the CBO analysis, in its current form, would facilitate a budget deal.

Mike McCurry, the White House press secretary, said that it was “not at all clear at this point” that the GOP intends to put the extra savings into spending that would make the budget more acceptable to Clinton.

He suggested that the Administration would try to persuade the CBO to revise the figures further. The temporary spending legislation to which both sides agreed last month provided for consultations between the Office of Management and Budget and the CBO, he noted. OMB has previously predicted more economic growth than the CBO, leading to greater savings.

“It’s required, and we expect that once they’ve done this calculation they’ll come forward and consult formally,” he said.

The forecast was issued against the backdrop of a possible partial shutdown of the federal government. Spending authority for several agencies expires on Friday at midnight and House Speaker Newt Gingrich (R-Ga.) has said that he will not advance legislation to restore temporary funding unless there are serious negotiations with the White House on the broader issue of balancing the budget.

Administration officials were cool to suggestions that Clinton should agree to the top-level meeting that the GOP leadership proposed on Sunday to move the process forward. McCurry said the White House would review the new CBO numbers, then decide whether such a top-level meeting was warranted.

“It’s obvious from comments of Republican leaders that they intend to manufacture another crisis,” said Rep. David R. Obey (D-Wis.).

Times staff writer Janet Hook contributed to this story.