Surpluses Play Key Role in Clinton’s Proposed Budget

Launching a novel era in budget politics, the White House on Monday unveiled a $1.77-trillion budget plan for the next fiscal year that presumes surpluses as far as the eye can see, even though it proposes costly fixes for Social Security and Medicare and includes a broad array of new spending.

Beyond the numbers, the fiscal blueprint serves to spotlight likely concerns of the White House and Congress in a post-impeachment, post-deficit era. The administration would preempt the across-the-board tax cuts sought by conservatives by steering the surpluses into areas of defense and social spending, including such liberal favorites as education, health care, the environment and urban development.

And it would commit the vast share of new spending to the retirement and health-care expenses of the aging baby boom generation, a top priority for the White House.

“Yes, we’re saving Social Security and Medicare, and yes, that will prepare for the retirement of the baby boomers, and yes, it will save money for our children and grandchildren,” Clinton said of the spending outline. “But it will also guarantee them an economy of continuing, enduring stability--and a hedge against the storms that may happen beyond our borders.”

Republicans quickly derided the White House plan as a big-government strategy that fails to provide the level of tax cuts that growing surpluses make possible and creates a grab-bag of new spending programs.

“The budget contains something for everyone and that’s what’s troubling,” said House Ways and Means Committee Chairman Bill Archer (R-Texas). “It’s a throwback to the days when the government tried to solve problems by raising taxes and throwing money at problems.”

Because budget forecasts are notoriously wide of the mark, there is uncertainty in the administration’s plan for the long haul. Still, many analysts believe that a combination of strong economic growth and relative restraint in federal spending has markedly improved the government’s financial outlook.

The budget projects a $4.4-trillion ocean of black ink over the next 15 years. In the fiscal year that ended Sept. 30, the surplus--the first in three decades--totaled $70 billion.

The White House projects that the surplus will rise to $117 billion next year and, without changes in spending or tax policy, explode to $393 billion in 2009. The nonpartisan Congressional Budget Office also projects large surpluses.

The government’s expectation of indefinitely growing surpluses is like a poor man’s discovery of a wallet bulging with bills, said Henry Aaron, an economist with the Brookings Institution think tank here. The news is as disorienting as it is welcome.

“This is a big issue and a big debate,” Aaron said, “and people have not quite understood the fundamental nature of the difference between the visions being presented.”

Budget Brawl Over Surpluses

The jockeying over the surpluses spotlights the two parties’ conflicting visions of government.

Clinton seeks to use the surpluses to sustain Social Security and Medicare, the cornerstone Democratic programs of the 20th century.

Republicans want to give individuals greater responsibility for their own well-being. Archer and Senate Budget Committee Chairman Pete V. Domenici (R-N.M.) have proposed using part of the surplus--perhaps as much as 15%--for a tax cut.

“It’s much more of a philosophical fight about how big do you want the government to be,” said Stephen Moore, director of fiscal studies at the Cato Institute, a libertarian think tank. “If they don’t cut taxes, the money won’t be used for debt reduction, it will be used for a whole catalog of new spending ideas.”

Not accidentally, the budget covers were printed partly in black, symbolic of the color of ink that officials are pledging for their spending plans. Although Monday’s release was nearly eclipsed by the media frenzy surrounding Monica S. Lewinsky’s questioning in a Washington hotel, the administration nonetheless tried to grab attention for its spending priorities for next year and beyond.

Highlights of Proposed Budget

Among the highlights:

* Defense. The administration would spend $261 billion for the fiscal year that begins Oct. 1, a hike of $12.6 billion from this year. It would also provide $13 billion for the department’s nuclear weapons programs, pay for a 4.4% pay hike for personnel (the largest in two decades), set aside nearly $3 billion for U.S. military activities in Bosnia and Iraq and increase spending on missile defense and weapons procurement.

* Taxes. The White House proposed only $32.6 billion in specific tax cuts over five years, a move that is certain to fuel debate in Congress, where the Republican majority views the growing surpluses as a source of money for sweeping tax cuts. Among the White House proposals are a $1,000 tax credit for people who care for infirm relatives and a $500 tax credit for parents who stay home with infants less than a year old.

Offsetting the tax cuts is a proposed crackdown on corporate tax shelters and other tax breaks that would bring in an additional $33 billion over five years. Also part of the White House proposal is a 55-cent-a-pack increase in the tobacco tax that would raise $35 billion over five years. The administration also expects an additional $16 billion from the tobacco settlement between the states and cigarette manufacturers.

* Social Security. Describing the need to fix Social Security as his “first and foremost” priority, Clinton would dedicate $2.7 trillion of the projected surplus to that goal over 15 years. The most controversial part of the strategy is a White House proposal to use a share of that total for government investments in the stock market. That approach remains popular with many Democrats but has drawn criticism that the investment decisions inevitably would be skewed by political pressures.

* Health care. In addition to devoting nearly $700 billion of the 15-year surplus to rescuing Medicare, the president would institute a variety of smaller programs, including assistance for cancer patients participating in clinical trials and greater access to Medicare for individuals between the ages of 55 and 65.

* Justice. The Justice Department would spend $20 million to pursue Clinton’s recently announced plan to sue the tobacco companies and to expand the fight against cyberterrorism.

* Education. The White House would spend up to $4 billion to build and remodel schools and more than $1 billion to begin hiring 100,000 teachers by 2005.

Overall, Clinton’s budget would reserve 62% of the long-term surplus money to strengthen Social Security; 15% to preserve Medicare; 11% on “universal” investment accounts that would provide workers with money for retirement savings; and 11% on a range of activities in education, defense and research.

Only a few years ago, economic forecasts showed burgeoning deficits in the late 1990s that would lead to fiscal calamity in the next century as the baby boomers retired. But an unexpectedly strong U.S. economy has helped push back the day of reckoning, analysts said, with a tidal wave of tax receipts in recent years making the government far wealthier than expected.

Clinton’s budget plan anticipates modest, 2% economic growth over the next two years, increasing to 2.4% by 2004. Officials did not build a steep, prolonged recession into their forecast, although an average recession would not eliminate the surpluses.

The White House also assumed inflation of 2.3%, a level consistent with the experience of recent years. A sharp, lengthy increase could also throw the government forecast awry.

Centrist economists caution that, while it is sound policy to reserve the surplus rather than spend it on new programs or tax cuts, Clinton’s approach tilts heavily toward the needs of the elderly, said Gene Steuerle, a senior fellow at the Urban Institute, a Washington research organization.

“We’re telling our children that . . . almost all their taxes should go to support us in our retirement,” said Steuerle, a former Treasury official. His projections have 81% of the federal budget by 2060 going to Social Security, Medicare and Medicaid under the Clinton plan.

The legacy of three decades of deficits is a $3.7-trillion national debt that soaks up huge interest payments every year. In 2000, the administration expects to spend $215.2 billion on interest payments. Only Social Security, Medicare and defense spending are larger. Spending on interest is projected to decline gradually as past debt is retired, with interest payments diminishing to less than $173 billion in 2004.

Spending next year would be up slightly from $1.73 trillion in fiscal 1999. But federal outlays are declining significantly as a share of the overall economy, with the 19.4% share expected next year the smallest since 1974.

On Capitol Hill, Clinton’s new budget plan threatened to result in the same outcome on fiscal policy in Congress that it has in his impeachment trial--a bitter partisan battle over fundamental issues.

GOP Disagrees With Clinton Spending Plan

Although Republicans openly endorsed Clinton’s proposal to reserve 62% of the projected budget surplus to bolster the Social Security trust fund, they differed sharply with Clinton over what to do with the rest.

“We see the surplus as an overpayment by American taxpayers,” said House Speaker J. Dennis Hastert (R-Ill.). “Basic fairness dictates that some of this overpayment should go back to the taxpayers in the form of tax relief.”

Republicans dismissed Clinton’s budget plan as a “lame duck” proposal, designed primarily to please his own constituency rather than to open a dialogue with the GOP-controlled Congress.

“I don’t see this as an opportunity for the president to get what he wants [while] we get what’s left over,” Domenici told reporters. He complained that the president’s plan was “filled with gimmicks.”

Times staff writers Eric Lichtblau, Art Pine, Paul Richter and Robert A. Rosenblatt contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Shifting Priorities

How each federal dollar was spent in 1990, and how President Clinton plans to allocate spending in 2000

*--*

1990 2000 Defense 23.9% 15.5% Social Security 19.6% 22.9% Medicare 7.7% 12.1% Other payments to individuals 13.2% 15.7% Grants 10.8% 16.0% Interest 14.7% 12.2%

*--*

“Other” category not shown

****

Extra Cash

Boosted by a growing economy, current projections of surpluses far outpace projections made in 1990.

Compiled by TRICIA FORD / Los Angeles Time

Source: Office of Management and Budget

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

THE FEDERAL BUDGET

Where it comes from

Individual income taxes: 48%

Social Security payroll taxes: 34%

Corporate income taxes: 10%

Other: 8%

****

Where it goes

Social Security: 22%

Grants to states/localities: 17%

National defense: 15%

Medicare: 11%

Interest on debt: 11%

Medicaid: 6%

Other means-tested entitlements*: 6%

Other: 12%

****

More Money for Troops

The Clinton administration hopes to steer money into an array of defense and social initiatives, including the largest pay raise for troops in almost two decades.

Pay increase for the military

2000: 4.4%

* Includes earned income tax credits, food stamps and veterans’ pensions

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TAXES: Budget proposes tax credits and other tax relief totaling $36.2 billion over five yearsry. Among those aimed at the middle class: a credit of up to $500 for stay-at-home parents caring for infants under age 1.

SOCIAL SECURITY: The budget calls for spending 62% of government surpluses expected over the next 15 years to help bolster Social Security’s cash reserves. Without help, the retirement program is expected to run short of cash in 2032, during baby boomers’ old age.

DEFENSE: Pentagon would get $261 billion in new spending in 2000, including the largest pay raise for military members in nearly two decades--4.4% in 2000, followed by five consecutive increases of 3.9%.

Sources: Office of Management and Budget, Department of Defense, Associated Press, Times Washington Bureau