Landmark Deal to Balance Budget Reached

WASHINGTON — In a landmark agreement that once seemed economically implausible and politically impossible, President Clinton and Republican leaders of Congress on Friday announced a long-awaited deal intended to balance the federal budget in 2002.

The accord, produced after weeks of closed-door talks between negotiators from the White House and Congress, was helped along by a booming economy and a projected windfall of tax revenue, requiring less austerity than feared by many Democrats.

Key details remained sketchy and in some cases unresolved. But White House officials described the accord as historic in its significance, coming after years of partisan acrimony over the budget.

“Everyone could find something that he or she wishes were in the budget. There is no perfect agreement,” said Clinton, alluding to the potentially rough road ahead for the accord as it works its way through Congress. But, he said, “it’ll never get any easier to do this job. . . . We have to do it now.”

In particular, details of proposed tax cuts projected to cost the government $85 billion over five years remained unclear, raising the possibility of future conflict over taxation of capital gains and inherited family estates. Nonetheless, Republican leaders spoke favorably of the compromise that eluded them during the bitter budget debates of 1995 and 1996.

“It is a compromise agreement. It had to be,” said Senate Majority Leader Trent Lott (R-Miss.), who announced the agreement in the Capitol’s elegant rotunda. “But it is not a compromise of our principles.”

The deal would provide tax cuts long sought by Republicans, new limits on Medicare spending, and increased “investments” in education, the environment and other domestic concerns that Clinton has long wanted.

An eleventh-hour decision to drop proposed new curbs on Social Security cost-of-living increases and restore funding for other domestic programs is expected to blunt some of the opposition of congressional Democrats, who had been among the loudest critics of a draft agreement circulated Thursday.

“I . . . am encouraged at the movement toward addressing Democratic concerns in regards to additional funding for Medicaid, children’s health insurance, welfare-to-work programs and food stamps,” said House Minority Leader Richard A. Gephardt (D-Mo.) in a statement. Gephardt said he was “especially pleased” that negotiators had backed away from plans to legislate cutbacks in cost-of-living adjustments.

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At the same time, forecasts of somewhat leaner inflation adjustments were built into the plan, based on expected changes to be implemented by the Bureau of Labor Statistics, which calculates the consumer price index.

“We will reach balance by cutting spending, not by raising taxes,” said Lott, reflecting ardent conservative views that out-of-control spending has posed a threat to the U.S. economy. “Under this budget, official Washington will learn to do with less.”

Indeed, the agreement is symbolic of a remarkable confluence of political interest between Republicans, who see balancing the budget as a crucial accomplishment in cementing their hold on Congress, and the president, who has proclaimed that very same goal as a cornerstone of his second-term legacy. Both sides hailed the accord as a triumph of bipartisanship over the ideological warfare that has marked the last two years.

In addition, the president and his negotiators were more than pleased at preserving some of Clinton’s favorite priorities, including $35 billion in new tax incentives for higher education, a tax credit for employers to hire welfare recipients, health coverage for 5 million needy children and spending on the environment.

The deal “is truly a remarkable accomplishment,” declared Treasury Secretary Robert E. Rubin.

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The agreement, if enacted, would set the broad outlines of fiscal policy for the next five years, with details yet to be worked out. It would:

* Eliminate the deficit by 2002, according to its architects, with the red ink steadily fading over the next five years.

* Cut taxes by $135 billion by providing credits to families with children, a cut in estate taxes, expanded individual retirement accounts, reductions in capital gains taxes and new tax breaks for college tuition. (The net cost of the tax cut would be $85 billion because the reductions would be offset by other revenue.)

* Slow the growth of spending under Medicare by $115 billion, mostly by reducing payments to doctors and hospitals but also by instituting new premiums for home health care coverage. Those premiums would be about $1 a month, with the poorest beneficiaries to be exempt.

* Slow the growth of spending for Medicaid, the federal-state health care program for the poor, by about $16 billion. But negotiators dropped earlier plans to impose for the first time a fixed cap on federal payments under the program.

* Provide about $32 billion for domestic initiatives sought by Clinton, including expanding health insurance coverage for children and restoring some benefits to disabled legal immigrants who were going to lose them under last year’s welfare reform law.

All week, rumors spread that a deal was imminent but the final 48 hours took on a “perils of Pauline” quality reflected in the ever-shifting plans laid for unveiling the agreement. On Thursday, Republican leaders ordered scaffolding to be put up in the Capitol’s rotunda. But as hopes for an agreement faded, workers dismantled it.

At the White House, meanwhile, reporters shouted questions to the president Friday as he prepared to board a helicopter ferrying him to a Democratic legislative retreat in Baltimore. “We’re working on it,” Clinton shouted back.

An hour later, he announced the plan. By then, laborers in the Capitol had rebuilt the stage--in front of a huge oil painting of the signing of the Declaration of Independence.

In part, the announcement was delayed as White House representatives explained parts of the plan to Democrats on Capitol Hill, who initially had blasted it for shortchanging some of their priorities. By Friday afternoon, however, some of the complaints were muted as the administration had restored money for some programs and tossed out a proposed cap on Medicaid payments to the states.

An intraparty brawl over cost-of-living benefits also appeared to be avoided, at least for now, by reducing the scope of a projected cutback in future inflation adjustments. Although the magnitude of any future change will be determined by the Bureau of Labor Statistics, the budget deal envisions a 0.3 percentage-point reduction in the consumer price index. Negotiators backed away from an earlier proposal for Congress to enact an additional 0.15 percentage-point reduction.

Another last-minute problem arose from good economic news. The Congressional Budget Office re-estimated its deficit projections and found that this year’s deficit would be only about $70 billion, about $45 billion less than previously thought, and that future deficits would also be lower. These new CBO estimates meant that the negotiators had about $90 billion more to work with, whether for additional spending, tax cuts or quicker deficit reduction.

“I am pleased at the positive progress that has been achieved,” said Gephardt, who had been notably displeased just a day before.

To be sure, the agreement is just one step in a long legislative process that will be needed to enact the proposals into law and eliminate the deficit. Congress will have to pass legislation on spending and taxes, and many of the details will be subject to fierce dispute. For example, many fine points of the tax cuts were purposely left unresolved, in deference to members of tax-writing committees, including the details of a capital gains cut that the White House had previously proposed only for home sales.

If the plan passes Congress, all goes as projected and the economy avoids a major, unexpected downturn, 2002 would mark the first time that the government’s accounts have been in balance since 1969, when President Richard Nixon was in office.

Initial reaction to the agreement suggested that opponents of the deal would face a major challenge in defeating it. A substantial majority of Republicans--whose party controls both houses of Congress--seemed inclined to support it, along with a minority of Democrats.

Times staff writer Sam Fulwood III contributed to this story.