In a Switch, White House Argues Against Deficit Cuts

JUST a few months after underscoring the importance of cutting the deficit, the Clinton administration is now strongly rebuffing congressional efforts to wield the budget scythe.

A variety of cost-cutting measures have been introduced in both the House and Senate, ranging in scale from $90 billion to $21 billion in savings over five years. But on Friday, President Clinton wrote to lawmakers that any additional savings should fund health reform, not deficit reduction. ``We should ... not take risks with our now fledgling recovery,'' he wrote.

Deputy budget director Alice Rivlin backed this argument in testimony before the House Banking Committee earlier this month. ``Substantial additional deficit reduction at this time could slow the growth of the economy at a crucial point in the business and policy cycles,'' she cautioned.

As an alternative to large cuts scheduled to be voted on today in the House, the White House introduced a $37 billion budget-cutting plan on Saturday. That is about as much as the economy can bear, Vice President Al Gore Jr. told reporters at a Monitor breakfast last week.

But by backing off from larger deficit reduction, the White House appears to be renouncing the arguments for spending cuts that it was making as recently as this summer. Since taking office, Mr. Clinton and his chief economic advisers have credited their commitment to deficit reduction with pushing interest rates down and spurring growth.

Now, deficit hawks are assailing the White House for trying to use budget savings to fund costly health-care initiatives. But Laura D'Andrea Tyson, chairwoman of the president's council of economic advisers, says such ``investment'' is not at odds with long-term growth goals. Both she and budget director Leon Panetta defend the need to spend more now, and chip away at the deficit later.

``The problem is, we have made in this administration a fundamental commitment to pay the mortgage on our national economy,'' Mr. Panetta told reporters on Friday.

``We have also made a fundamental commitment ... to pay the mortgage on the house, to also pay for repairing the roof, and pay for health-care bills,'' the budget director continued. ``The one thing that we cannot accept is the effort to take money from paying for the health-care needs of this country, and putting it to paying the mortgage. We think it undermines the basic effort that this administration is all about.''

The administration has gotten high marks from outside economists for tackling the deficit - but its current plan for putting more money into health-care reform, not deficit reduction, is being hotly debated.

``We were pleasantly surprised when the administration said it wanted to work on deficit reduction, and we were doubly surprised and pleased when Congress said it wants to go further,'' says Peter Jarrett, chief economist on the United States desk at the Paris-based Organization for Economic Cooperation and Development.

But Mr. Jarrett, author of the OECD's just-released annual survey of the US economy, notes that either tax hikes or reduced government outlays carry a price. ``When you tighten fiscal policy, you remove demand from the economy and that depresses growth,'' Jarrett says. But this is partially offset by lower interest rate, he says.

In the long term, he adds, ``when you divert government spending for tanks, aircraft, or transfer payments to interest-rate sensitive components of the economy, such as business spending, housing, and durable goods, that's a healthier form of spending, because it means economic growth and more jobs.''

The relation between deficit cuts and the economic health of the nation is also being much debated on Capitol Hill. Reps. Tim Penney (D) of Minnesota and John Kasich (R) of Ohio, co-sponsors of a bill that would cut $90 billion from the budget, say reducing the deficit will help, not hurt, the economy. Long-term economic growth relies on low interest rates that spur consumers to buy and businesses to expand. Rates will rise, they say, if government abandons deficit reduction by stepping up federal spending.

Support for this view comes from the National Federation of Independent Business, whose membership numbers 600,000 small and mid-sized firms that are big contributors to job growth. Business confidence is low and job creation has been anemic because entrepreneurs are uneasy about the administration's economic management, says William Dunkelberg, NFIB's chief economist.

``They know that added government investments in health-care or worker- training programs will be funded by business,'' he says. An abandonment of deficit reduction, he warns, will push interest rates higher and make it more expensive for employers to expand operations and hire new workers.