Budget Deal Alters Politics, Pocketbooks

This could be Washington's equivalent of the falling of the Berlin Wall.

The historic budget and tax accord this week, if the economy continues to cooperate, could finally sideline the debate that has consumed politicians here for more than two decades - how to balance the budget and reduce the deficit.

Instead, politicians will argue about how to save Medicare and Social Security for the long term without blowing a new hole in the federal government's finances. Congress may even have the confidence to tackle the tax code.

The question now is whether Washington's powerbrokers can build on this pact or whether the deficit-busting consensus will dissolve into renewed partisanship.

"Without a common foe to rally against what are you going to do?" says Martha Phillips, executive director of the anti-deficit Concord Coalition, who considers this a momentous moment.

For many Americans, the achievement of a balanced budget and the first tax cut in 16 years will have a subtle but significant impact on family pocketbooks, and perhaps change perceptions of Washington.

"If the budget actually does end up being in balance, it will have a huge psychological impact," says Robert Reischauer, a former director of the Congressional Budget Office. "One of the factors that has contributed to the lack of faith the American people have in their institutions and leaders has been failure of our institutions and leaders to balance the budget as they continuously have promised to do over the last 15 years."

The new plan balances the budget by 2002 - the first balanced budget since 1969 - and reduces federal taxes for the first time since the 1981 Reagan tax cuts. The current plan's $92 billion net reduction over five years pales in comparison with the $750 billion in cuts then.

BALANCING the budget has been a popular goal with the voters, but they have balked repeatedly when faced with the tough choices involved. In 1986, Republicans lost control of the Senate after approving a package of Social Security reforms when President Reagan gave in to pressure from Democrats. President Bush lost the 1992 election after he broke his "read my lips" promise and agreed to raise taxes in 1990. In 1993, President Clinton got an anti-deficit tax increase through the House by one vote. The next election gave Republicans control of the House for the first time in 40 years.

Congress and the president wrestled over balancing the budget for a year and ended up in the government shutdowns of 1995-96. The public blamed the GOP for the shutdowns but returned Republicans to a House majority last fall. Both sides decided voters wanted them to cooperate. Thus the stage was set for the budget deal announced in May, which Congress will vote on this week.

The booming economy has made the job easier, closing the deficit gap far sooner than anyone anticipated. This leads many liberals and some conservatives to question whether the government would be better off without the deal, which they intensely dislike.

"It's a real question whether on balance we are better off with or without this budget agreement," Ms. Phillips says. "The best you can say is that nobody is happy or satisfied with this deal, so I guess that's the mark of true compromise."

Phillips and Mr. Reischauer both warn that Congress and the White House must now move swiftly to tackle the looming entitlements problem caused by the massive retirements of baby boomers between 2010 and 2030. "We're going to replace 24 million people over 65 today with 48 million in just the next few decades," she says. "The nation and our federal programs are not prepared to deal with this."

While negotiators dropped three controversial provisions to reform Medicare, congressional aides say the president and Republican negotiators have agreed on a commission to study the issue and report back by December 1998.

In addition, debate on other priorities will cut across party lines. Fiscal hawks in both parties want to reduce the national debt before approving new spending. Others, including the president and Vice President Al Gore, argue that America must invest in education and infrastructure to compete in the world. Conservatives say defense spending has been cut too much.

Moderates in both parties may support additional limited tax cuts. House majority leader Dick Armey of Texas and publisher Steve Forbes want to replace the current graduated income tax with a flat tax. Rep. Bill Archer (R) of Texas advocates a consumption tax, similar to a national sales tax, instead.

But Reischauer says the budget deal leaves no wiggle room for "fundamental tax reform ... because any kind of major change like that requires some flexibility to reduce [tax] burdens" that are shifted from one group to another. "In a sense we've just given away that flexibility."

Budget Highlights

Child Tax Credit

- A $400-per-child credit begins in1998, rises to $500 in 1999

- Phases out for individuals earning $75,000 and couples making $110,000

Education Incentives

- Tax credit up to $1,500 a year for first two years of college

- Up to $1,000 a year for final years

Estate Tax Exemptions

- Rises to $1 million over 10 years for individuals, and to $1.3 million for family farms and businesses

Capital Gains

- Lowers top rate from 28 to 20 percent, and lowest rate from 15 to 10 percent

- On assets held for more than five years, lowest rate falls to 8 percent; highest drops to18 percent in 2001

Children's Health

- Provides $24 billion for expanded children's health-care coverage

Medicare

- Savings of $115 billion from limiting payments to hospitals and doctors