Clinton Unveils $1.7-Trillion Budget to Abolish the Deficit

President Clinton presented Congress on Thursday with a $1.7-trillion budget for fiscal 1998 that would increase education spending by 20% and offer tax relief to middle-income Americans while reducing spending in other areas to keep the government on track toward a balanced budget by the year 2002.

Clinton’s budget would trim the growth of Medicare spending, cap federal payments for the Medicaid and deny the defense budget any inflationary growth. It would eliminate some of the tax subsidies that benefit corporations.

In large part, however, it is a budget made up of a multitude of relatively minor changes aimed at turning the projected 1998 deficit of $121 billion into a $17-billion surplus in the year 2002. Many of the cuts would take effect only in the year 2001, when Clinton will be out of office.

Republican congressional leaders, abandoning their previous practice of declaring the president’s budget dead on arrival in Congress, declared their willingness to use Clinton’s plan as the basis of negotiations over the shape of next year’s government spending and revenue policies.

“For too many years it seemed as if our deficit would grow forever, that there was nothing we could do about it,” Clinton said.

But as a result of a healthy economy and reductions enacted during Clinton’s first four years in the White House, including major cuts in welfare spending, the deficit has already been cut by nearly two-thirds. From a record $290 billion in 1992, the red ink ebbed to $107 billion last year before slipping back up to an estimated $126 billion this year.

“Finishing this job of balancing the budget will not be easy, but it is vital for the continued health of our economy,” Clinton said, conceding that it would require “difficult cuts in hundreds of government programs.”

Although Clinton talked about the painful cuts included in his new budget, his top budget and economic officials were reluctant to point to specifics, besides those in the health programs and corporate welfare. Republicans criticized him for not going far enough.

If Clinton and Congress can reach a consensus and pursue a path to a balanced budget, it would be the first time since 1969 that the federal budget would be in the black.

“For the first time in 30 years we’ll be able to tell the American people that we have brought fiscal sanity back to their government,” Franklin D. Raines, director of the White House Office of Management and Budget, told reporters.

The biggest savings from any one program would come from the Medicare program for the old and disabled. The growth of that program over the next five years would be $100 billion less than envisioned under current law, with the savings achieved primarily by limiting payments to doctors and hospitals.

Another big chunk of savings in the president’s five-year savings plan, $34 billion over five years, comes from eliminating tax loopholes and subsidies to corporations.

Clinton is already banking on the savings to make possible a $98-billion tax cut over five years. His plans include a $500 tax credit for dependent children, a $10,000 tax deduction and a $1,500 tax credit for post-secondary education and an exclusion from capital gains taxes for the first $500,000 on the sale of a home by married taxpayers.

Education

This is the president’s highest priority in his 1998 budget. He hopes to make college more affordable for low- and middle-income students through new tax breaks and savings incentives for the middle class and an expansion of the Pell Grant program for low-income students.

The president also used the budget as an opportunity to ask Congress to increase funding for the Head Start preschool program and charter schools. He proposed a technology literacy program to integrate computers into classrooms.

Welfare

The president’s budget would scale back the impact of the sweeping welfare legislation that he signed into law last year. Included in that measure, which is projected to save an estimated $51 billion over the next five years, are deep cuts in the food stamp program and in a range of benefits for legal immigrants.

Clinton vigorously opposed both during his reelection campaign last year and his budget would restore $17.9 billion of those cuts, or more than one-third of them. Congressional Republicans have made clear their intention to thwart these efforts.

The president’s plan would restore cash and medical benefits for legal immigrants who become disabled while in America and for many legal immigrant children, including those who are disabled. Another provision would delay the ban on food stamps for legal immigrant families and for the elderly and disabled poor through fiscal year 1997, which ends Sept. 30.

The budget would soften a provision that limits able-bodied adults without children to three months of food stamps in any 36-month period. They could stay on food stamps if they agree to work, and the budget would provide money to subsidize the cost to employers of hiring such individuals.

Clinton’s proposal also would include $3.6 billion over five years to develop jobs for welfare recipients forced to go to work, an initiative that is less controversial on Capitol Hill.

Health

Some of the biggest savings envisioned by the White House spending blueprint would come from reductions in the expected growth of Medicare and Medicaid, the national health insurance programs for the elderly, blind, disabled and poor.

To achieve $100 billion in savings over five years from the Medicare program, Clinton proposed to move more senior and disabled Americans into managed-care plans and to reduce the growth of its payments to some health care providers, including those who offer home health care to the elderly and disabled. By stepping up anti-fraud efforts, the administration hopes to save $3 billion over five years.

The administration also projects savings of $9 billion over five years in Medicaid, largely by limiting how much the federal government will contribute to the states for Medicaid coverage for each eligible person. The spending plan would make it easier for states to move Medicaid patients into managed-care programs as well.

At the same time, the administration plans to expand health care coverage to workers who are between jobs and to their children.

Housing

While other agencies are being squeezed, the Housing and Urban Development Department would get 30% more new spending authority--$24.8 billion, up from $19.3 billion now.

Much of the money would not actually be spent for many years. It would go toward averting a crisis in HUD’s Section 8 housing program, through which the federal government has signed 2.7 million 10- and 15-year contracts with landlords to provide housing for low-income elderly and disabled people.

In 1998, 1.8 million contracts will come due. If they are not renewed, HUD Secretary Andrew Cuomo warned, 4.4 million people could be without a place to live, creating “an unprecedented explosion of homelessness nationwide.”

Cuomo said that he wants not only to save the Section 8 program but to expand it. He has requested $305 million to provide affordable housing for an additional 50,000 families. Congress rejected a similar request last year.

HUD is also asking for $100 million to expand its Empowerment Zone and Enterprise Communities programs, designed to help create jobs in poverty-stricken areas; $50 million to crack down on derelict landlords and $20 million--more than twice last year’s appropriation--for a program to fight crime in public housing developments.

Taxes

Clinton proposed a spate of new tax measures designed to provide relief to middle-income families, to help finance education and training and to encourage companies to hire more low-skilled persons who are no longer eligible for welfare.

The list includes:

* A tax credit amounting to $300 for each dependent child under age 13 for families earning up to $60,000. The credit would rise to $500 per child in the year 2000, and it would also be adjusted each year to offset inflation. Taxpayers earning between $60,000 and $75,000 (adjusted gross income) would receive only partial benefits.

* A tax break for homeowners who are selling their principal residence, allowing them to escape payment of capital gains taxes on the bulk of the profits. Married taxpayers would be able to exclude up to $500,000 in profits, while singles could take up to $250,000 tax-free. The provision would apply to all homes sold on or after last Jan. 1.

* A tax write-off of up to $1,500 in college tuition expenses for single taxpayers with incomes of up to $50,000 a year or for couples earning up to $80,000. Singles earning up to $80,000 and couples making as much as $100,000 would qualify for a partial credit.

* Expansion of the deduction now permitted for contributions to an individual retirement account, an IRA, to permit taxpayers to use--and periodically withdraw--their money to finance education, first-time home purchases and, in cases when they are out of work, medical care.

* Business tax breaks allowing companies to claim a credit for as much as 50% of the first $10,000 in wages that they pay to welfare recipients who are being eliminated from the welfare rolls, as provided by last year’s welfare law.

Defense

The administration’s budget proposes to make only minor changes in defense spending and, for the third year, would shift money from modernization to troop readiness.

The $265-billion proposal is up from $262 billion in the current fiscal year; but in inflation-adjusted terms the Pentagon component is 3.4% less than the level enacted by Congress for this year. It is also substantially less than the congressional leadership wants to spend and a fight is expected.

Defense Secretary William S. Cohen has declared that the nation’s “procurement holiday” must end. But the problem in the last three years has been that the Pentagon did not reap as much savings as expected from closing bases and reducing personnel.

One bright spot for Southern California: For the ballistic missile defense program, the budget includes $168 million more than was planned last year for fiscal 1998. Several California companies are working on the program.

Space

The National Aeronautics and Space Administration, which avoided the sharp cuts it was earlier slated to absorb over the next few years, unveiled a significant initiative to explore the universe for signs of life beyond Earth, using new telescopes, spacecraft and scientific organizations.

The effort, dubbed the Origins Program, would accelerate the pace of the Mars Surveyor program, a mission in the year 2005 that would return Martian samples to Earth. NASA Administrator Daniel S. Goldin also said that NASA plans to launch a new space-based infrared telescope by the year 2001 that would search for planets around stars outside our solar system.

Foreign Policy

Clinton requested $19.5 billion for State Department operations, embassies and diplomacy, foreign aid and related functions, an increase of about 1% after adjustment for inflation. The increase would arrest a steady erosion that had cut the budget by almost half since the mid-1980s.

The president asked for $100 million for the coming year and an advance commitment of $921 million in the next one to pay off the U.S. debt to the United Nations and other international organizations that the administration calculates at over $1 billion.

Total foreign aid spending was set at $12 billion, a small increase from current spending.

Times staff writers Melissa Healy, Paul Richter, Sheryl Stolberg, Norman Kempster and Art Pine contributed to this story.

More Inside

* FEARS GROW: The prospect of losing aid darkens the new year for Vietnamese immigrants such as Huynh Van Sang, above. A3

* IT’S A START: The GOP has complaints but says Clinton’s budget is a starting point. A19

* LOST AID: About 135,000 children will lose disability benefits under welfare reform. A22

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Who Wins, Who Loses

The impact of the president’s budget would vary considerably, depending on lifestyle.

A taxpayer who would gain the most:

Middle-aged couple with no corporate ties, with college-aged children and children age 12 or under.

A taxpayer who would be hurt the most:

Young professional who works for a corporation, flies often and has a modest investment portfolio.

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Where Taxes Go

Social Security: 23

Discretionary*: 17

National defense: 15

Net interest: 15

Medicaid/Medicare: 18

Other: 12

* such as education, housing, science and transportation

Sources: AP, Tax Foundation, Office of Management and Budget