Now playing in Congress: Spending Fight II

Congress comes back to work to a dramatically different political atmosphere than just a few weeks ago.

A slumping economy and a shrinking surplus are setting up a new battle over budgets and priorities - and could scale back many of President Bush's signature legislative initiatives, such as overhauls of education and defense. They could also set the terms for the Democratic effort to take back the House and hold on to the Senate in 2002.

"The Congress and the White House have some very hard choices to make," says Robert Bixby, executive director of the Concord Coalition, a Washington-based group that lobbies for fiscal responsibility. "They were assuming they could do a big tax cut and a lot of new spending. They can't do that now."

After the nonpartisan Congressional Budget Office (CBO) lopped $128 billion off its estimate for next year's budget surplus, Democrats called on Mr. Bush to come up with a new plan to pay for his priorities. Unless he does so, "we're going to have a great deal of difficulty avoiding a train wreck," says Sen. John Kerry (D) of Massachusetts.

The White House, for its part, insists that the shrinking surplus is actually good news, because it puts Congress in a "fiscal straitjacket." It's Congress that must exercise the restraint to make it all work, the president says.

One of the most visible casualties of the coming budget wars could be education. Until this summer's budget crunch, Congress had been moving toward a historic reform of education policy. Both the House and Senate passed versions of a bill that included annual testing and more accountability for schools in exchange for more flexibility in the use of federal education dollars. In the past, these issues had been so controversial for both liberal Democrats and conservative Republicans that they had sunk previous efforts to reform education.

But the deal between the White House and key Democrats turns on an administration commitment that there would be more resources for education, especially for poor and failing schools. Bush asked for a $669 million increase in education for fiscal year 2002. The House increased it by $5 billion; the Senate, by $16 billion. Without additional funding, support for the bill could fall away, say lawmakers on both sides of the aisle.

"To demonstrate leadership, this president must come up with the additional resources to fund this program," says Jim Manley, a spokesman for Sen. Edward Kennedy (D) of Massachusetts, a key broker for this bill.

Over the August recess, House and Senate staff worked out some of the simpler policy disagreements between the Senate and House versions of this bill. But big issues remain, and one of the most controversial is funding, say staffers close to the negotiations.

The defense budget faces an even tougher battle. The president is requesting a $18.4 billion increase in spending over what was proposed in the budget resolution. But critics - especially those within his own party - note that this new request comes before the Defense Department has completed its overhaul of national defense requirements.

In addition, Senate Democrats are signaling that defense will likely be the the last of 13 spending bills to clear the Senate. (The House has already passed nine appropriations bills; the Senate, five. The current fiscal year expires Sept. 30.) That order of voting means that the president's request for additional funding will almost certainly be coming out of funds that both parties agreed to set aside for a Social Security "lock box" - a move that could hurt Republicans in the 2002 elections.

In a letter to the president last week, the House and Senate Democratic leadership called on Bush to "provide specific guidance" on how he plans to cover defense and other new spending initiatives, such as the $33 billion in tax breaks provided in the energy bill the House passed on the eve of the August recess.

According to the CBO, all these new spending initiatives are competing for only $9 billion in expected surpluses, aside from the Social Security surpluses that both parties have committed not to spend.

"For Democrats, saving the Social Security Surplus is not a symbolic goal - it is a commitment we have made to the American people, and one that we thought you shared," wrote House Democratic leader Richard Gephardt (D) of Missouri and Senate majority leader Tom Daschle (D) of South Dakota.

Already, key lawmakers from agricultural states are predicting that the shrinking surplus will crowd out other popular priorities, such as a prescription-drug benefit for seniors, and the agricultural subsidies that farmers say they cannot do without.

And many House Republicans are saying that even a defense increase is in trouble if it breaks into the Social Security surplus that many of them campaigned to protect. "The next election will be about Social Security, like the 1982 election," says Paul Light of the Washington-based Brookings Institution. "The 1982 election was a referendum on Ronald Reagan's management of the economy and Social Security, and the 2002 election will do the same for George Bush."