What $500 Billion in Cuts Means for the US Deficit

FOR President Clinton, this is the oft-repeated first principle he is seeking from the federal budget now under negotiation between the House and Senate: $500 billion in deficit cuts over the next five years.

So just what does that mean?

The most obvious, common sense answer, of course, is wrong. It does not mean that the next five annual deficits will each squeeze below the current deficit by an amount that adds up to $500 billion. That would be too difficult to achieve.

Nor is it likely to mean that the next five deficits will add up to $500 billion less than they might have been without this budget plan - although that, at least, is the goal.

This is because the first rule of federal budget politics is to send the "baseline" on an upward float. The baseline, in this case, is projected future deficits. Making sure it is high is the first way to make sure savings appear high.

The White House counts as savings cuts that were already required, although not specifically made, for 1994 and 1995 under the 1990 budget agreement. Arguably, this is fair because current budgetmakers have to actually make the cuts. Also arguably, it is misleading because those cuts are required with or without the current budget plan.

The Congressional Budget Office does not give the Clinton plan credit for those cuts. So the officially nonpartisan CBO translates the $500 billion (actually $497 billion) savings in the Clinton budget resolution to $452 billion.

Many of the details of baseline building are controversial. John Cogan of the Hoover Institution, a conservative research organization, was an Office of Management and Budget official in the Reagan administration. He estimates that at least half the $85 billion the Clinton plan cuts from discretionary domestic spending are phony.

For example, in 1986 Congress cut payments to hospitals for capital improvements by 15 percent. Each year since, they have been 10 percent under the original 1985 figure. Each year, that 10 percent is counted as a spending cut. The Clinton budget extends that cut each year, explains Mr. Cogan, even though the spending level stays the same.

The $500 billion figure still matters. Taken on its own terms, it remains a stable target for Congress and the president to seek.

But any number projected out five years is dubious. Economist Joel Prakken, vice president of L.H. Meyer & Associates, a St. Louis economic forecasting firm, says he surveyed the members of the National Association of Business Economists this spring on Clinton's budget projections. They gave an average of about a 20 percent chance that the deficit figure would be near correct.

The current-year deficit has just been revised downward by the Office of Management and Budget from $320 billion to about $290 billion. This good news does not help the Clinton administration pass its budget package. In fact, it lowers the baseline deficit, possibly making it even tougher to reach $500 billion in deficit savings.

If Mr. Clinton gets his plan, and federal forecasts are correct, the deficit in 1998 will be just over $200 billion, down from about $290 billion this year and a projected $360 billion that year.

The better news is that the federal deficit would be only half as large a percentage of the gross domestic product as it is now.

Yet, the five years of deficits will still have added over a trillion dollars - about 25 percent - to the ever-increasing national debt.