Worsening Budget Deficit Tests Clinton Team's Fiscal Ingenuity

PRESIDENT-ELECT Clinton is about to star in a horror movie: Nightmare on Budget Street.

Unfortunately, as Mr. Clinton and his budget aides are discovering, the nightmare is real and the budget deficit is worse than expected. Yesterday, President Bush, in his final budget sent to Congress, estimated the budget gap for 1994 to be $292.4 billion, down from an estimated $327.3 billion this fiscal year and up from an actual $290.2 billion in 1992.

"Clinton will have to be the Terminator to get the deficit down," says Stanley Collender, a budget analyst at Price Waterhouse in Washington.

Clinton's budget team, led by Rep. Leon Panetta (D) of California, the designate for director of the Office of Management and Budget (OMB), has already begun crunching numbers. Technically, Clinton is supposed to submit a budget by Feb. 1. However, the Panetta team is not expected to produce one until mid-March.

The Bush document will have no real role in the budget process. "It virtually has no policy choices and does not include a Bush economic forecast but eight different forecasts with several different options on spending," Mr. Collender says.

Clinton is already discovering the difficulties of putting together the new budget. During the Little Rock economic gathering, former Carter OMB official John White told Clinton that the deficit was higher than the Democrats' public pronouncements.

"It is pretty obvious that since the John White summary, Clinton realizes the deficit is worse than he thought and the programs he himself delineated early in the campaign are not going to make it," says former Rep. Bill Frenzel (R) of Minnesota, now a fellow at the Brookings Institution.

The main culprits for the higher deficit numbers are lower tax revenue because of the economic slowdown, the need to spend more to bail out the savings and loans, and higher spending on Medicare and Medicaid.

The S&L bailout remains with the nation because Congress ran out of money to pay for it in the last budget. Instead, it will be in the new budget. According to one report, the Bush administration estimates it will cost $32 billion over the next five years to complete the bailout instead of the $42 billion estimated last year.

The bailout cost may come down if there is a run-up in real- estate values as the economy recovers. However, the low inflation rate is likely to keep real-estate price increases modest.

"It makes it very difficult to be a winner here," says James Miller, a former Reagan OMB chief who is now at Citizens for a Sound Economy, a Washington think tank.

Clinton hopes to be a winner by streamlining the military. He has targeted about $60 billion in military spending over the next four years.

The recent zip in the economy may help Clinton get some additional revenue. Mr. Miller estimates growth in the economy will add $80 billion to $90 billion in revenues for the 1994 fiscal year.

Despite these additional revenues, the Clinton team is likely to sprint ahead on some new taxes. As part of his campaign, Clinton said he would increase taxes on individuals making over $150,000 ($200,000 filing jointly) and add a surcharge on millionaires. "He'll get through the rich-folks tax quite readily," Mr. Frenzel says.

This tax increase, however, will not provide Clinton with enough revenue to fulfill a campaign pledge to cut the budget deficit in half at the end of four years. Recently, there has been some talk of adding a gasoline tax. For every 1 cent of tax, the government receives $1 billion.

"Gasoline taxes are one of the hardest to raise," Frenzel says. During the last budget negotiating session, Frenzel says "the only thing the Republicans and Democrats agreed on is that neither liked the gasoline tax." Frenzel says there is some discussion in Congress over a broader-based energy tax.

Clinton is also likely to try to raise taxes on alcohol and tobacco. But the former governor will be lobbied heavily by current governors who frown on increases in federal excise taxes, Frenzel says. "It lowers consumption and prevents them from raising their own taxes."

Although the Clinton budget team is experienced at dealing with budget numbers, it will also be working with the largest freshmen class of congressmen and senators in 44 years. "It will be difficult to get a complicated tax package through a brand new Congress," Miller predicts. Instead, Miller says Clinton will have to work on substantive tax reform in his second year.