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Deficit may push Clinton into retreat on economy


LITTLE ROCK, Ark. -- President-elect Bill Clinton met with his top economic advisers yesterday with all the signs pointing to a retreat from his campaign promise of a major middle-class tax break and his opposition to a federal gasoline tax.

The economic strategists met in the wake of the Bush administration's worsening deficit projections, issued 24 hours earlier. The new budget figures suggest the nation will be $176 billion farther in the hole than expected over the next five years.

Faced with this setback, Mr. Clinton may have to increase taxes or cut spending to make up the new short fall, which almost certainly will thwart his goal of halving the deficit in four years.

"It gives them some more flexibility and justification for doing things that would not be popular," said Max Sawicky of the labor-backed Economic Policy Institute, which has advocated a $60 billion growth package for fiscal 1994.

"We are not backing away from any pledges," Mr. Clinton's communications director, George Stephanopoulos, said. "Clearly what we learned [from Wednesday's budget] was that the deficit is far bigger than anyone thought. . . ."

Mr. Stephanopoulos said the Clinton estimate was that in fiscal 1997the budget was likely to be nearer to $360 billion than the $319 billion projected by the Bush administration. He added that halving the deficit remained the "goal," but many economists doubted that it was now attainable.

"He is certainly in a bind," said Arthur Hall, economist with the independent Tax Foundation. "There is just not enough money in the places he said he was going to get the money from. He never made a very large gesture to the middle class. I think this erases even that small gesture."

During the campaign Mr. Clinton promised a middle-class income tax cut or a child tax credit which would have saved families $480 a year for each child. Any income tax cut now seems impossible, but a middle-class child tax credit to fulfill his campaign promise could still be linked to increased taxes on the wealthy.

"Either he is going to break his promise, or he is going to find ways to cut spending, or he is going to find a way to increase taxes," said Mr. Hall.

Mr. Clinton is committed to raising taxes on incomes above $200,000 a year, and improving tax collection from foreign corporations. But neither of these is likely to come anywhere near solving his deficit problem.

The most likely new source of major revenues is a federal gasoline tax. But this, too, would require Mr. Clinton to abandon the opposition to the idea he voiced when it was first broached during the campaign by Paul Tsongas, a Democratic rival, and independent Ross Perot, who wanted a 50 cent-a-gallon increase introduced over five years.

Mr. Clinton has appeared more receptive to the idea recently, but has made its imposition conditional on offsetting any disproportionate impact on the middle class.

Each penny on a gallon of gas brings in $900 million, according to a House Ways and Means aide. A 15-cent gas tax would raise $4.5 billion, not a major dent in a $300 billion-plus deficit; this could lead Mr. Clinton to look at a higher tax rate. The gas tax has support on Capitol Hill among such key players as Illinois Democrat Dan Rostenkowski, chairman of the tax-writing House Ways and Means Committee.

Other possible revenue-raisers: taxes on capital gains at death; an increase in capital gains taxes not covered by the narrowly targeted reductions Mr. Clinton proposes to encourage investments; taxes on employee-paid health benefits; taxes on upper-income Social Security recipients.

Beyond this Mr. Clinton will have to look at spending cuts, with the major focus on defense and entitlement programs such as Medicare, the program for the elderly.

With his experts around him, Mr. Clinton yesterday focused on the figures in the Bush budget, worked on large-scale economic objectives such as growth rates, employment targets and productivity increases, examined his options for cutting defense, non-defense and entitlement programs, and looked at ways of raising revenues.

Among those at the table in the governor's mansion here yesterday were Vice President-elect Al Gore, Treasury Secretary-designate Lloyd Bentsen; Budget Director-designate Leon E. Panetta; Robert Rubin, director of the new National Economic Council; Laura D'Andrea Tyson, chair-designate of the Council of Economic advisers; Deputy Treasury Secretary Roger Altman, Deputy Budget Director Alice Rivlin, and incoming White House chief of staff Mack McLarty.

Two economists tipped for office in the Clinton administration were also there: Alan Blinder, of Princeton, who is expected to join the president's Council of Economic advisers; and Lawrence Summers, of Harvard, chief economist with the World Bank, who appears headed to be assistant Treasury secretary for international affairs.

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