Budget Counterpunch

By George J. Church.

The Democrats unveil an alternate plan for the economy

In its opening rounds, the Great Budget Battle of 1981 looked like a shadowboxing exhibition in which the Reagan Administration easily prevailed over little more than token opposition. But last week it suddenly seemed to become more of a slugfest, with the outcome in some doubt. The President's program of draconian cuts in spending and taxes came under increasing attack in both houses of Congress, and from both right and left.

In the Republican-controlled Senate, the plan met an unexpected setback. Two weeks ago the Senate had passed, by 88 to 10, a resolution that would reduce expenditures for many federal programs by as much as or even more than Reagan had recommended. But when it came time last week to consider a resolution setting overall spending and revenue targets for fiscal 1982, which starts Oct. 1, the Budget Committee thumbed down the Administration's plan by a vote of 12 to 8. Three conservative Republicans, worried that Reagan's proposal to slash income tax rates by 30% over the next three years would produce enormous, inflationary deficits, joined the Democrats in defeating the bill.

In the Democrat-controlled House, the trouble was both more predictable and more serious. The Democrats last week produced what amounts to a full counterbudget. Its politically appealing main elements: spending reductions that the Democrats say would slightly exceed Reagan's but give more money to social programs and less to defense; and a one-year tax cut some $14 billion smaller and much less sweeping than the President's. The promised results: a deficit in fiscal 1982 only about half the size of the one that Reagan's plan might produce; and a balanced budget by fiscal 1983, a year ahead of the President's schedule.

The Democrats' plan was designed to attract both liberals, who worry that Reagan's cuts in such programs as food stamps and Medicaid would grievously hurt the poor, and conservatives, who are fearful of a tide of red ink stemming from the President's proposed tax slashes. Republicans promptly assailed the program as the product of some highly questionable arithmetic. Nonetheless, the House Budget Committee last week voted 17 to 13 to reject Reagan's spending and revenue estimates and substitute a set prepared by Chairman James Jones of Oklahoma, the principal architect of the counterbudget. Noted Jones: "The Administration says that its budget is untouchable. No Administration has ever made such demands, and no Congress has ever accepted such demands." Only one Democrat, archconservative Phil Gramm of Texas, sided with the twelve Republicans in support of the President. Thus when Congress broke on Friday for a two-week Easter recess, the President's figures had been challenged by the budget committees of both legislative chambers.

That is far from the end of the story, however. All this occurred while the President was incapacitated and unable to exert his distinctive persuasiveness. Many on Capitol Hill feel that the setbacks are reversible. The White House will certainly try to arm-twist Republican defectors on the Senate Budget Committee back into line. Moreover, in a House floor vote expected in late April or early May, some 40 conservative Democrats who hold the balance of power may yet vote for a set of spending and revenue estimates closer to the President's figures than to those of their own party. House Speaker Tip O'Neill conceded last week that the Democrats are launching their counterbudget "at an inopportune time," when sympathy is rising for a President recuperating from an assassination attempt. In a visit to Reagan's hospital bed, O'Neill reported that his mail, which had swung against the White House budget before the assassination attempt, had turned pro again and added, "Mr. President, you're making my life miserable." Replied Reagan, in the same joshing spirit: "That's the best news I've heard today."

On the other hand, as last week's committee votes demonstrated, admiration for the President's courage does not automatically translate into congressional votes for his tax and spending cuts, even among Republicans. The White House is also handicapped by Reagan's inability while convalescing to continue his highly effective personal selling campaign for his program. Thus Reagan may have to make some unforeseen compromises, especially on his tax plans, to get the main elements of his program passed.

After long consultations among House leaders, the Democrats' counterprogram was spelled out last week in two documents. One was a 236-page "chairman's mark" by House Budget Committee Chairman Jones, detailing spending recommendations. The other was a Chicago speech by Dan Rostenkowski of Illinois, chairman of the tax-writing House Ways and Means Committee, giving the outline of a tax plan.

In a way, the Democrats' program paid an ironic tribute to the change in the political climate wrought by Reagan's landslide election and the vigor of his budget blitz. The two documents are far more conservative than any group of Democrats would have approved even in January. Jones himself admits, "It really isn't a radical departure from the President's program." But the Democrats are trying to reverse the two parties' traditional roles by painting themselves as the champions of budget balancing and by picturing the Republicans as irresponsible tax slashers who are voicing "faith in the fiscal equivalent of faith in a free lunch," to quote the "statement of principles" adopted by House Democrats last week. Still the program does keep faith with party ideology--and constituents. Details:

SPENDING. Reagan had recommended spending cuts of $48.6 billion in fiscal 1982, reducing total outlays to $695.3 billion and, after some $54 billion in tax cuts, leaving a deficit of $45 billion. The House Budget Committee staff calculated, however, that expenditures would actually total $717.8 billion and the deficit $50.4 billion. Along with many non-Government forecasters, the committee staff does not expect inflation, interest and unemployment rates to come down quite as rapidly as the President predicts. Jones recommends holding expenditures to $714.6 billion. That would ax spending by $3.2 billion more than Reagan would, at least by Jones' arithmetic. Even allowing for a $40 billion tax reduction, the Democrats' plan, claims Jones, would almost halve Reagan's proposed deficit, to $25.6 billion.

Jones accepted, by his own estimate, 75% of Reagan's expenditure-slashing proposals, including some of the most celebrated: for example, wiping out the CETA public service jobs program and reducing federal grants that enable states to offer extended benefits to the unemployed. The heart of the difference over the remaining 25% is a matter of priorities. Jones originally recommended spending $4.4 billion less for defense next fiscal year than Reagan would, largely by canceling a 5.3% military pay increase due July 1; conservative Democrats would not go along, so he dropped the idea. The committee did agree to provide $7 billion more than Reagan for social programs, although most of these programs would still be cut severely. Some samples: food-stamp and child-nutrition spending would be reduced by $1 billion each, vs. Reagan's recommendations of $1.7 billion and $2.1 billion; federal aid to elementary and secondary education would be sliced 10%, vs. Reagan's 25%; the Legal Services Corporation, which provides free counsel to the poor in civil cases and which Reagan wants to kill, would be saved but its funding slashed by $121 million, or more than a third. The only significant Reagan recommendation that Jones rejected totally was the President's proposal to save $1.5 billion by putting a "cap" on federal contributions to finance Medicaid.

At a White House press conference, David Stockman, Director of the Office of Management and Budget, accused the Democrats of "singing the same old tune of higher spending," and Treasury Secretary Donald Regan added, "They've seen the light but they want to stay in the tunnel." They had a point: to preserve funds for social programs, the Democrats are relying in part on other "savings" that seem highly questionable. Among them: $4.9 billion to be pared "by elimination of waste and mismanagement," a hoary promise rarely if ever fulfilled; and $1.5 billion to be recovered from oil companies that allegedly overcharged the public. Still the Democrats are agreeable to spending cuts of roughly the size that Reagan wants; economically, if not politically, that is more important than the question of who bears the burden of those cuts. And the White House knows it. Says one aide: "We're going to be working on a compromise somewhere between 75% of what we want and 100% of what we want. That's a long way from January, when skeptics wondered if Congress would go along with any significant cuts at all."

TAXES. Rostenkowski outlined a plan that was ingeniously crafted, in his words, to "strike that essential political and economic balance [necessary] to pass Congress." While many details are yet to be filled in, the plan seemingly contains something for almost everybody. For business, savings in depreciation write-offs slightly larger than those Reagan proposes. For the rich, an immediate cut in the top tax rate on "unearned" income (dividends, interest, rents) from 70% to 50%, an idea that the Reagan Administration once considered proposing. For the middle class, cuts in income tax rates that would primarily benefit people earning $20,000 to $50,000 a year; and an easing of the "marriage penalty," which now compels many working couples to pay more tax on their combined incomes than they would if they were single and riling separately. For the poor, an increase, as yet unspecified, in the lowest amount of income on which federal taxes are levied. Says Rostenkowski: "This is not a Democratic package. It is a consensus package. It gives a greater share of the tax cut to middle income families and has a stronger obligation to protect the working poor."

The net cost to the Government would be roughly $40 billion for one year, vs. some $54 billion initially under Reagan's plan. Besides that, Rostenkowski claimed that his plan would do more than Reagan's to stimulate the savings and investment that the economy needs if it is to resume noninflationary growth. Under Reagan's plan, in this view, it can only be hoped that Americans would save a large portion of income tax cuts rather than spend the money in inflationary consumption. Rostenkowski argued that his plan contains provisions specifically targeted to encourage saving. One is a proposal to increase the amount of annual income that a worker not covered by a company pension plan can save in a tax-sheltered individual retirement account (IRA) from $1,500 to $2,000, and to extend IRA opportunities to employees with pension plans who want an extra retirement cushion.

Although congressional Republicans did not participate in the drafting of Rostenkowski's "consensus" plan, many of them privately prefer it to Reagan's program, which they too fear would spur inflationary deficits. One example of how deep that fear runs: the Senate Budget Committee last week estimated that Reagan's spending and tax plans taken together would produce a near record $60 billion deficit in fiscal 1982, or $10 billion above even Jones' figure. That chilling estimate prompted the three conservative Republicans to bolt. Said Defector William Armstrong of Colorado: "The only way we could salve our consciences and vote for the '82 [Reagan] budget was to show credibly that we were on the path to a balanced budget. We are not on that path."

For the time being, the Administration is united in holding out for its own plan. But if congressional skepticism about the President's tax plan persists, the Administration may face a nasty dilemma. Some White House advisers are privately prepared to compromise on taxes.

But "supply side" hard-liners view the Reagan program as a seamless whole that cannot be substantially altered without its effectiveness being ruined. As they see it, only Reagan's across-the-board tax cuts, and the assurance that they will continue into the future, will give all sectors of the population the incentive to work, save and invest. Says Assistant Treasury Secretary Paul Craig Roberts: "You simply don't generate sufficient long-term confidence with any one-year plan. What you're saying is that you don't really believe in cutting taxes or in the plan itself. Business won't invest on that basis."

In this view, deep spending cuts and a one-year modest tax reduction could result in the worst of all possible economic worlds: an inflationary recession.

Thus some economic advisers are telling the White House to fight to the end for its tax plan--at the very time that the Administration is having trouble countering Democratic strategy and keeping its own conservative troops in line. The outlook is not only for a long argument in Congress, but divided counsel within the Administration. --By George J. Church.

Reported by Neil MacNeil and Johanna McGeary/Washington

With reporting by Neil MacNeil, Johanna McGeary/Washington

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