Washington Dance Begins Over Budget Clinton and GOP circle warily

It's too early for detailed proposals. But the minuet to balance the federal budget by the year 2000 has begun. And a balanced-budget amendment to the Constitution may be part of the bargain.

A newly elected President Clinton and Republican Congress have lost no time in sending each other signals across the ballroom floor.

Senate majority leader Trent Lott of Mississippi makes it clear that Republicans want to see the president's proposals on balancing the budget and reforming Medicare before they introduce their own. The president now says that while he doesn't think the nation needs a constitutional amendment requiring a balanced budget each year, he no longer opposes it.

Both sides are responding to what they perceive as the people's wishes. "The American public wants this Congress to balance the federal budget," says Sen. Larry Craig of Idaho, chairman of the Senate Republican conference. "In all campaigns this year, by Democrat and Republican alike, this was an issue."

It will be a while before the two sides can get down to details. Key budget players, such as Rep. John Kasich (R) of Ohio and Sen. Pete Domenici (R) of New Mexico, the House and Senate Budget Committee chairmen, are out of town.

Since discretionary spending currently makes up only 35 percent of federal spending, most experts agree that balancing the budget is impossible without reforming entitlements - especially Medicaid and Medicare, which are already running in the red and could be bankrupt in four years.

The Republicans, still seething over a year-long ad campaign by the president and his allies accusing the GOP of trying to destroy Medicare, want the president to show his hand first. "The president needs to state to the American people how he's going to address the issue of Medicare," says Sen. Connie Mack of Florida, Senate Republican Conference secretary. "Clearly he has a different approach to solving the problem, and we'd like to see what it is."

Even before the details are worked out, however, the broad outlines - and the difficulty - of a balanced-budget deal are clear. The package will be somewhere between last year's congressional budget resolution and Mr. Clinton's proposal, says the Brookings Institution's Robert Reischauer, a former director of the Congressional Budget Office.

Mr. Reischauer foresees a $100 billion cut in the growth of Medicare spending, coming from health-care providers: doctors, hospitals, and nursing facilities. Reductions in Medicaid spending will be somewhere between the Republicans' proposed $72 billion and the president's proposed $54 billion of last year.

Reischauer expects the president and Congress will agree on a "relatively favorable set of economic assumptions on which to base their plan."

Besides the Medicare and Medicaid adjustments, he predicts some additional entitlement cuts gained through adjusting civil-service and military pensions. Then, he says, discretionary spending will have to be cut sharply, meaning serious reductions in the budgets for the Departments of Defense, Education, Interior, Commerce, Justice, State, Housing and Urban Development, and Treasury. Some 90 percent of those agencies' budgets are discretionary spending.

But the challenge will be reduced a bit, Reischauer says, because the projected deficit for 2002 is likely to be lower than was projected nine months ago. The reasons:

*Growth rates in Medicare and Medicaid spending won't be as great as thought. This proved true even in fiscal 1996.

*The economy has proved stronger and interest rates lower than the Congressional Budget Office predicted. "Some of that strength will be carried forward into the future," Reischauer says. Inflation will be lower, and a smaller deficit will ease pressure on interest rates.

*The 104th Congress was able to trim discretionary spending somewhat, with beneficial effects down the road.

*The farm bill passed this year will trim $2 billion off the projected deficit for 2002, while the welfare-reform package cuts $12.7 billion.

Still, Reischauer believes spending cuts of the magnitude required are "unrealistic." Congress "will pass something that promises to balance the budget," he says. "But this won't be the budget package that ends the need for future budget packages.... The question is, 'Are you moving in the right direction and at the right speed?' The answer will be yes."

The president indicated Tuesday that he could support a balanced-budget amendment if it included an "escape hatch" for bad economic times. "We just don't want an amendment to wind up making our recession worse and causing us to do things that are counterproductive that you would never do in a recession," he said. But the president cannot veto proposed constitutional amendments. The House of Representatives appears likely pass a balanced-budget amendment, as it did last year.

The question will be whether 67 senators of both parties can agree. Last year's proposal missed by one vote. The new Senate will include more conservatives.