WASHINGTON -- The head of the Congressional Budget Office rejected Republican assertions yesterday that the $500 billion deficit reduction package is hurting the economy.

Instead, CBO Director Robert Reischauer argued that the measure generally was well crafted to avoid such harm.

"From a macroeconomic standpoint, it is better to have most of the spending cuts in future years," as planned under the measure, because the economy will be growing faster then and should be able to withstand greater fiscal restraint than it can right now, Reischauer said.

The head of the nonpartisan agency made his remarks in response to a barrage of questions from Republicans on the House Budget Committee.

The Republicans, including Rep. Christopher Shays, R-Conn., and Rep. Denny Smith, R-Ore., repeated charges made throughout the budget debate this summer that the package was bad for the economy because most of its $250 billion of spending cuts are to be implemented after 1995, while most of its $250 billion of tax increases will take effect by next year.

But Reischauer said that because 80% of the package's tax increases are on the incomes of well-to-do taxpayers, it will not dampen economic growth as much as budget measures proffered by Republicans that would substitute deeper spending cuts for the tax increases.

"In the short run, spending cuts have a larger restraining effect on the economy because they cut consumption," Reischauer said. "Tax increases on upper-income individuals have a less restraining effect because the chances are the taxes would come out of savings rather than consumption."

Reischauer said that he was not raising an alarm about the plans of Many members of Congress to try to enact more spending cuts this fall. "If the economy behaves as CBO and the consensus of private forecasters think, and keeps chugging along between 2.5% and 3% in the next few years, that would not be a dangerous move."

However, "you might want to ask. yourselves how much of those cuts you want to parcel out in 1994 as opposed to 1995, 1996, and 1997, when the economy would be stronger." he said.

Reischauer said that he is in no way endorsing higher taxes on the rich or on their savings as the best way to reduce the federal deficit.

"There's no question it would be penny-wise and pound-foolish if every increased tax dollar represented a dollar of private savings," he said. "The object of the whole exercise [of reducing the deficit] is to increase private savings."

The tax increases affecting the top 1% of taxpayers, which raise their tax load to the highest level since 1979, represent only the easiest increases available to Congress as it tries to come to grips with the daunting task of eliminating the nearly $300 billion deficit, Reischauer said.

"We relied on the less painful measures in the deficit package," but the next round of deficit cuts will not come so easily, he said. "Now we are paying the price for the party we had during the 1980S."

Reischauer rejected another Republican argument that the tax increases in the budget plan would hit small businesses particularly hard and cause them to curtail their hiring plans.

"I was always skeptical that the deficit package would have a bad effect on small businesses," he said. To the contrary, "they should benefit from the lower interest rates induced by the measure, since they are borrowers."

But the Republicans countered that many businessmen and bankers are convinced that rates are low because of little business and consumer confidence in the economy, which in turn was caused by President Bill Clinton's budget plan and other economic policies.

"I see low interest rates as evidence that people have a lack of confidence in the economy," said Rep. John Kasich, R-Ohio, the budget-committee's ranking minority member.

Kasich said that Republicans do not believe the budget package will reduce the deficit to below $200 billion, as recently forecasted by both CBO and the Office of Management and Budget.

"We'll have to see who's right, but we don't think you will be able to reach the low deficits you are projecting because the economy will be growing slower than you think," Kasich told OMB Director Leon Panetta, who also attended the hearing.

Panetta insisted that the economic growth forecast and the low interest rate expectations underlying the administration's $180 billion deficit estimates from 1995 to 1998 are "realistic."

"If there's any consensus among private economists right now, it's that we're looking at low interest rates in the long term," Panetta said. "I feel confident that these are legitimate projections."

Panetta said that the administration's growth forecast takes into account the possible contractionary effects of the President's health-care reform package, as well as the possibly stimulative impact of the North American Free Trade Agreement.

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