Back to The Other War

By Ed Magnuson

Amid the fears of a U.S. war with Iraq, America's struggle against a no less threatening enemy has been all but forgotten. That foe is the soaring federal deficit. In the four months since President Bush and congressional leaders convened their budget summit, Administration estimates of this year's deficit have exploded from $100 billion to $149 billion, not counting the $100 billion bailout of bankrupt savings and loans. The gap could grow even larger if the economy, already on the brink, is pushed into a recession by surging oil prices from the Persian Gulf crisis.

That prospect makes coming to grips with the deficit all the more urgent. But throughout the blame game that has passed for negotiations, both sides have been more interested in scoring political points than in solving the problem. So the prospect is that both the Administration and its Democratic opposition will use the confrontation with Saddam Hussein as an excuse for delaying action to break the impasse.

The White House has been smarting because it has been outmaneuvered by Democrats. First the President outraged many Republicans by backing away from his "no new taxes" pledge. Then, after both sides agreed to submit budget proposals simultaneously in late July, the Administration plan leaked and Republicans, seeing that it was studded with new taxes, bolted. The Democrats, relishing Bush's discomfort, withheld their ideas, and the summit collapsed without discussion of specific new revenues or spending cuts.

White House chief of staff John Sununu has been trying to avenge that hardball act. He had planned to have Bush go on the offensive, blaming / Democrats for the breakdown. But that plan was shelved as inappropriate after Iraq invaded Kuwait. Not until Budget Director Richard Darman and Treasury Secretary Nicholas Brady were out of town three weeks ago did Sununu get his way. He persuaded the President to interrupt his vacation -- and his direction of the U.S. response to Saddam's aggression -- to blast the Democrats for the impasse. That awkwardly timed sally appeared to embarrass Bush. He concluded his finger-pointing speech by promising to become "more statesmanlike and try to resolve this national problem."

The time for statesmanship has come. This week the talks will resume in the less than luxurious setting of Andrews Air Force Base, outside Washington. Away from the press and lobbyists, White House and congressional leaders will attempt to fashion an agreement before the Oct. 1 deadline set by the Gramm- Rudman-Hollings Act. If they fail, $100 billion in across-the-board spending cuts -- the so-called sequester -- will go into effect, with $25 billion coming out of military spending and the rest from such activities as prosecuting drug kingpins, closing veterans' hospitals and suspending student loans.

The summiteers' only significant achievement so far was to agree in July on a deficit-reduction target of $50 billion. But the fallout from the Middle East conflict has made that goal obsolete. It will be more difficult to make large cuts in defense spending (the Persian Gulf buildup alone is costing $46 million a day), and rising fuel costs have rendered one new source of revenue, an energy tax, politically unpalatable. As a result, both sides agree, the most that the deficit can be cut is $30 billion to $40 billion. They are thus more likely to reach for stopgap solutions, deferring hard choices until after the November elections. Among the possibilities they will consider:

-- Amending the Gramm-Rudman-Hollings targets. Cutting the deficit to $64 billion as the law mandates would require either the sequester or a combination of spending cuts and new taxes equal to 2% of the gross national product. Since the economy is faltering, either choice would deepen a recession. Now that American troops are in harm's way, the slash in Pentagon spending that the sequester would bring is unthinkable. Both sides are thus likely to postpone the deadline by several months.

-- Cutting the tax on capital gains from 28% to 19%. As investors rush to collect their gains at lower tax rates, this measure would yield as much as $5 ! billion in new revenues next year. (There would be a tax loss later.)

Such short-term measures may be all that can be accomplished, but they are not the comprehensive attack on the deficit that is necessary. The President, according to a White House official, "doesn't want to spend his political capital on some budget-balancing crusade when he might need it" to rally support for a prolonged American military presence in the gulf. Democrats too may have found the crisis atmosphere an excuse for postponing action on the deficit, which would require sharp reductions in popular domestic entitlement programs like Medicaid and farm subsidies.

Such a failure need not and should not occur. Both Bush and the Democrats still insist that the Middle East confrontation poses a danger to the economy so dire that a national emergency exists. The normal political concerns, including the pressure from special interest groups that so intimidates lawmakers, could be set aside in a spirit of national sacrifice. Last week Bush declared that action on the deficit was needed "now more than ever." But are those stirring words a call to action or mere rhetoric?

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Dixon Rohr

CAPTION: MOUNTING DEBT

With reporting by Dan Goodgame/Kennebunkport and Hays Gorey/Washington