While few experts seem to agree on what will happen with the federal budget in 1994, nearly everyone says that it will be a busy and contentious year.

"It's going to be nasty," said Bill Hoagland, Republican staff director of the Senate Budget Committee. "There still are a lot of pent-up feelings for further restraints on spending" among Democratic conservatives and Republicans, which puts them at odds with the Clinton Administration and its recent go-slow approach on the deficit, he said.

White House officials have been saying that with passage of their $500 billion deficit reduction package last summer, Washington can take a bit of a breather on the deficit and focus on enacting health care reform and other initiatives aimed at gradually reducing the deficit over the long term.

"I think if you go beyond that, you're really taking a lot more contractionary risk," said Robert E. Rubin, director of the White House National Economic Council. While additional spending cuts might keep interest rates lower, he said, "I think we've largely exhausted the benefits we're going to get from lower interest rates."

Rubin agreed, nevertheless, that the lively debate that began this fall over whether Congress should do more to reduce the deficit will probably continue into 1994. White House officials have been bracing for more efforts by conservatives early next year to dramatically cut spending.

When President Clinton offers his fiscal 1995 budget on Feb. 7, he is expected to bolster his position in the debate by presenting a significantly improved deficit outlook, and attributing it, in part, to his economic initiatives. The budget will show the deficit falling nearly by half from its high of $290 billion in fiscal 1992 to $150 billion by fiscal 1998, said Office of Management and Budget Director Leon Panetta.

But Hoagland said many in Congress feel the Clinton plan does not go far enough. Their dissension as well as other strains will bloom in the spring when it become painfully apparent that even Clinton's top priority - health care reform - does not have the votes to pass in the House.

Others, including William Griggs of the forecasting firm Griggs & Santow Inc., see a health care reform plan passing next year, but producing the opposite effect of what Clinton is expecting - a bulge in the deficit.

Another area where Hoagland and others see serious clashes is defense. The Pentagon and defense hawks in Congress will resist further large budget cuts, pointing to renewed fears of instability in Russia and the continuing economic woes of states like California where the defense industry is a primary employer.

Congress is scheduled to get 1994 off to a running start addressing these contentious issues, beginning in the Senate with debate over leftover items from 1993. These include the constitutional balanced budget amendment and a conservative plan to slash spending by another $100 billion over five years in health care and other areas.

Setting an Agenda

Action on the two measures comes over and above the usual congressional action on the fiscal 1995 budget. Clinton's budget will attempt to set the agenda for 1995 not only on health care and defense, but on investment programs such as education and infrastructure.

The President's budget will set off a tug-of-war in the congressional appropriations process with its proposals to allow for increased spending on the investment programs by severely curtailing spending on other programs with less priority, according to administration officials and private analysts said.

As if the anticipated struggles over investment, defense, and health care didn't pose enough unknowns, a bigger event is befuddling forecasters and making predictions about the outcome of the 1994 budget debate extremely difficult. That is the long-awaited vote on the constitutional amendment to require a balanced budget.

In past years, the amendment always fell well short of the two-thirds margin needed for approval in the Senate, but forecasters are laying odds that it will squeak through for the first time this spring. If it passes the Senate, most are assuming quick passage in the House, which came close to approving the amendment in 1992.

Stanley Collender, federal budget director at Price Waterhouse, said approval of the balanced budget amendment is "increasingly likely" principally because of the unusually large freshman class of Congress this session - including 14 new senators - which is overwhelmingly in favor of it.

Pete Davis, a former Republican budget aide who produces private forecasts for bond market clients, agreed that the strong pressure on freshman senators to "show they're right on the deficit" has put the sponsor of the balanced budget amendment, Sen. Paul Simon, D-Ill., in a strong position for victory

Also, many Democrats who voted for Clinton's tax-heavy budget package last summer may feel the need to demonstrate to their constituents that they are tough on spending and the deficit, Collender said. Voting for the constitutional amendment would be a "relatively easy" way to do that.

Since 38 states would have to ratify the amendment before it became part of the Constitution, approval in Congress would cause no immediate impact, Collender said. Many members of Congress may be betting that state legislatures will balk at ratifying the amendment in the next few years when they realize it would cause a dramatic loss of state and local aid, he said.

The danger that the amendment poses for states, both through lower federal aid and increased unfunded mandates, is a theme that the amendment's most prominent critic - the President - has been sounding as he braces for the upcoming Senate floor fight.

Besides drawing opposition from Clinton and Congress' Democratic leadership, the amendment has a long-standing nemesis in the Senate - Robert Byrd. The powerful West Virginia Democrat, who chairs the Appropriations Committee, can be expected to pull out his best ammunition to defeat the measure, so victory is still far from certain.

"It's really on the cusp" and could pass or fail by only one or two votes, Davis said. But it if does pass, "it'll be a real watershed event."

While the prospect of the balanced budget amendment finally passing Congress produces reactions among analysts that range from fear to amazement, no one is really sure what the practical outcome would be.

The White House's latest projections show that, under current budget policy as well as under the President's plans, the budget would not be balanced until well into the 21st century. But analysts caution against assuming that congressional approval of the amendment would immediately spawn a marathon session of spending cuts.

"It scares me, personally, that it has such a good shot," said Lawrence Chimerine, senior economic adviser with DRI-McGraw Hill Inc. But since the amendment wouldn't take effect until 1998, at the earliest, it would produce no major effort to eliminate the deficit next year and may not even affect some of Congress' major new spending plans, he said.

Cross Purposes

The financial markets could very well see Congress pass the balanced budget amendment one month, and then turn around and approve a universal health care plan the next, even though such a plan would ensure that the deficit stays well above $100 billion for the foreseeable future, Chimerine said.

Davis stressed that Congress' vote on the balanced budget amendment will not be driven so much by logic as political necessity in an election year. "It only makes political sense," he said.

Collender said that passing the amendment would have little immediate effect except to add to the already considerable pressure for enacting a package of spending cuts in the $75 billion to $100 billion range over five years.

Hoagland said that the balanced budget amendment has a good chance of passing, but opponents will probably be successful in delaying the Senate vote until May. By that time, the enthusiasm that many Democrats now feel for the amendment will have abated somewhat.

"Once you get into the health care debate, people will be seeing how tough" it is to try to eliminate the deficit through deep cuts in health care entitlements, Hoagland said.

Meanwhile, as Congress works on its appropriations bills for fiscal 1995, it will discover what the Clinton Administration is finding right now in its internal budget debate. It will be very difficult just to stay even with the discretionary spending caps set by last summer's budget, much less reduce the deficit further, Hoagland and Davis said.

The spending caps effectively freeze about one-third of the government's spending programs, including defense and state and local grants, at their aggregate fiscal 1993 level of $540 billion over the next five years. For any program under the caps to receive an increase, other programs would have to be cut commensurately.

"A lot of reality will be setting in by summer, and you will see the balanced budget amendment losing some of its momentum," Hoagland said.

In addition to the balanced budget amendment, Collender and Davis see some possibility of success for conservatives in their efforts to enact major spending cuts next year, but other analysts see little coming out of those efforts other than a big fight.

Last fall, Clinton and the House Democratic leadership narrowly averted the approval of a $90 billion House spending cut amendment sponsored by Rep. Tim Penny, D-Minn., and Rep. John Kasich, D-Ohio, after pulling many big Washington interest groups affected by the proposal into the bruising debate.

In lieu of the Penny-Kasich amendment, the House passed a package of $37 billion of spending cuts crafted by the administration, which was mostly derived from a 252,000 cut in the federal workforce. The House bill is expected to be largely used to pay for Congress' $20 billion anti-crime bill next year.

Some analysts expect a replay of the House battle when an amendment similar to the Penny-Kasich plan comes up in the Senate next year.

But Chimerine said that even if the conservatives succeed at pushing through their plan, most of the savings could be absorbed by a $50 billion increase in defense spending that the Pentagon has requested.

"It's easily conceivable we could put $10 billion a year back into defense," Chimerine said. "With all the unknowns at this point, I would not count on anything dramatic in terms of sharply lower government spending."

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