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o understand the continuing fervor for deficit reduction on Capitol Hill --

fervor that guarantees tight budgets for federal agencies for the foreseeable

future -- consider how House Democrats voted on the Penny-Kasich bill last

November.

Only 57 Democrats voted for the bill, which would have cut the federal

deficit by $ 90 billion over five years, principally by reducing spending. But

what's important for the future is that more than half of those 57 were

relatively new to Congress, having served less than four terms.

Voters concerned about taxes and spending are sending young,

deficit-conscious lawmakers to Washington, where they are making life difficult

for old-school lawmakers seeking to protect the science, space, labor, housing,

defense and foreign aid programs that they helped create. The Penny-Kasich

proposal came close to passing, failing by just six votes.

The public is fed up with high deficit spending, says Martha Phillips,

executive director of the Concord Coalition, a group led by prominent Americans

who seek a balanced federal budget. "People don't agree with these vested interests," she says. "When you argue why certain things should continue,

people say, 'You've got to be kidding,' and congressmen are starting to hear

this." The coalition has 250 chapters across the nation.

The deficit-reduction ardor manifested in the House in November will get a

tryout in the Senate within the next few weeks, when Senators will vote on a

balanced-budget amendment to the Constitution. The proposal has a good chance

of passing. Also early in the new session, the Senate may vote on a deficit-reduction package along the lines of the Penny-Kasich proposal. One

such plan, sponsored by Sens. Bob Kerrey, D-Neb., and Hank Brown, R-Colo., would

cut spending by $ 109 billion over five years.

The passion for deficit reduction remains strong even though federal deficits

are heading down, not up. Thanks to congressional action and new projections of

greater economic growth, the deficit picture actually has brightened a lot in

the last year. The Congressional Budget Office (CBO), which once projected the

deficit at $ 653 billion in 2003, now thinks it will be barely half that.

Timidity Tempers Fervor

Deficit-reduction fervor notwithstanding, Congress is unlikely to eliminate a

rash of programs anytime soon, if ever. Even as voters focus on the deficit,

long-time budget observers see little reason to believe that Congress will

change its habit of saving nearly every program -- though it will have to scale

many of them down.

In the 13 years since President Reagan first tried to end a slew of domestic

programs, Congress has chosen to eliminate only General Revenue Sharing, Urban Development Action Grants, the wool and mohair subsidy program, the

Superconducting Super Collider and a few others.

Though Congress's recent decision to kill the Super Collider was momentous,

it seems unlikely to mark a sea change, says CBO director Robert Reischauer. "I

would guess that we'll snag a very visible fish every other year," he says.

"That will leave the school largely unaffected."

Congress doesn't often initiate program terminations; the White House usually

has to take the lead. This year, President Clinton will propose some harsh

steps. Officials said in December that these would include phasing out mass

transit operating subsidies -- a step President's Reagan and Bush also proposed,

unsuccessfully -- and closing 1,200 Agriculture Department field offices.

Budget experts also expect Clinton to pick and choose among the spending cuts

and program eliminations contained in the Penny-Kasich legislation.

These

include eliminating the Interstate Commerce Commission, the State Justice

Institute, various boards and commissions, and the government's stake in the

helium industry, as well as cuts in the Economic Development Administration, the

Legal Services Corp. and acts and humanities funding. Clinton's decision on

these and other issues will be publicly unveiled when he sends his fiscal 1995

budget to Congress on Feb. 7.

Experts also predict a burgeoning fight over NASA's space station, with

opponents' arguments mirroring those that succeeded in killing the Super

Collider: Big science projects would be nice, but the nation can't afford them,

especially as domestic needs go unmet. And they expect a big push to close

field offices at USDA and the Department of Housing and Urban Development,

though Members of Congress will try to protect offices in their own districts.

With program terminations unlikely, Clinton and Congress will likely focus

their deficit-cutting energies -- and efforts to comply with five-year spending

limits enacted in 1993 -- on federal payrolls and other agency operating costs.

This raises the specter of an even "hollower" government than now exists.

Indeed, budget director Leon Panetta has said that 9 of the 14 Cabinet

departments will get less money to spend in fiscal 1995 than they have this

year.

The All-Important Caps

How tight are the statutory spending restraints? To fully understand the

situation, one needs to look back to 1990, the last time Congress enacted what

was supposed to be a five-year budget deal. Richard Darman, director of President Bush's Office of Management and Budget,

and Senate Appropriations Committee chairman Robert C. Byrd, D-W.Va., crafted

much of that deal. Darman wanted tough restrictions on new spending; Byrd,

however, was focused on protecting the "discretionary" -- that is,

non-entitlement -- spending under his committee's jurisdiction. They found a

way to satisfy both desires.

Darman pushed through pay-as-you-go rules stipulating that entitlement

programs could be expanded, or taxes cut, only if the costs were offset by

cutting other entitlements or raising other taxes. He also pushed through caps

on annual discretionary spending on defense, international affairs and domestic

programs. The caps were generous enough to provide a significant boost in

discretionary spending, which had been running at about $ 500 billion in fiscal

1990. The next year, it grew to $ 535 billion, and in fiscal 1992 to $ 537

billion.

The caps left little room for spending increases for fiscal 1994-95, but few

worried about that at the time. The assumption was that Congress would

renegotiate the deal, making room for more spending, after the 1992 election.

What the pro-spending crowd didn't figure on, however, was the altered

politics it would confront in 1993. Independent presidential candidate Ross Perot put the deficit issue out front. The 1992 elections brought 110 new House

members, many of them committed to cutting the deficit. Americans, whose

confidence in the federal government has been on the decline for many years,

increasingly came to view the deficit as symptomatic of a government that does

not work.

The mood change hit President Clinton like a thunderbolt. Last spring,

Senate Republicans filibustered his so-called "stimulus" bill to death, and

Congress pared back his proposed fiscal 1994 budget amendments, which exceeded

allowable discretionary spending limits.

"There are a lot of people running scared in this environment, and it's a

perverse environment," says a budget insider. "It used to be, five years ago,

Democrats could be counted on to spend money. Now, people look for votes

advertising [themselves] as deficit reducers."

Clinton and Congress did renegotiate the 1990 deal later in 1993. But the

anti-deficit political climate would not tolerate much added spending: Instead

of carmaking new money for domestic discretionary spending, Clinton and Congress

merely extended the existing limits -- some $ 547 billion in total discretionary

spending each year -- through 1998. This is the much-lamented " hard freeze"

that now constrains agency budgets.

The spending caps appear to be tight. On an aggregate basis, they leave no

room for budget increases to make up for purchasing power lost to inflation.

Nor do they make room for the "investment" spending that Clinton plans to push

in such areas as crime prevention, health research, child immunization, job

training, education and the Head Start program.

For domestic programs, however, the caps aren't as tight as they might

appear. Generally, if defense spending falls as the Administration has

projected, the caps would leave room for existing domestic programs to receive

inflation-based increases from year to year. Now that Congress has eliminated

the "firewalls" between defense, domestic and international spending, lawmakers

can boost domestic spending by cutting defense.

But two obstacles to such defense cuts remain: Pentagon intransigence and

international events.

The Fight over Defense

Before his departure, Defense Secretary Les Aspin publicly challenged the

contention that the Pentagon needed to cut up to $ 50 billion from its 1994-98

spending plan. Aspin argued that because DoD was being asked to finance certain new items, including an unanticipated pay raise for military personnel,

it would be unable to field forces capable of fighting two nearly simultaneous

conflicts, as called for in its post-Cold War strategy. By mid-December,

revised inflation forecasts enabled White House budget officials to narrow the

gap to $ 31 billion.

The Pentagon's budget hunger struck some analysts as greed. Lawrence Korb, a

senior Reagan Administration official now at the Brookings Institution, notes

that the $ 1.2 trillion that Clinton's plan calls for the Pentagon to spend over

the next five years is five times the amount Russia is expected to spend, 85

percent of what DoD averaged during the Cold War, and almost as much as the rest

of the world combined will spend. He says the proposed force structure, a

product of the Pentagon's recent "bottom-up review," vastly exceeds national

needs.

Until recently, a congressional aide says, "80 percent of our funds were

allocated to the Soviet threat and NATO." Now, he says, "we have a defense force

that's going to be 85 percent of what it was, with 80 percent of the threat

gone."

Aspin won some ground in his fight with Panetta. On Dec. 22, the budget

chief announced that Clinton had agreed to shift $ 8 billion to $ 9 billiondiscretionary spending to the Pentagon to finance the pay hikes.

At the same time, new foreign threats are looming, and old ones are

resurrecting themselves. While they don't seem to jeopardize defense cuts just

yet, they are giving some experts pause. North Korea's nuclear program -- and

its apparent designs on its southern neighbor -- is one example; the demagogic

Vladimir V. Zhirinovsky's strong showing in the recent Russian elections is

another.

Nor should one forget the increasing interplay between defense and domestic

concerns. More and more, the congressional split over defense spending is not

between "hawks" and "doves" or liberals and conservatives. Rather, it's between

those lawmakers with bases and weapons plants in their districts and those

without. Lagging job growth will only exacerbate that tension.

"We are sensing increasing resistance to defense trimming" among lawmakers

who used to vote for it, says a Senate Budget Committee aide. Analyzing Senate

votes on amendments to cut defense, the panel found "more North-eastern

Democrats vote against defense cuts than we would have expected."

Add all these elements together, and Capitol Hill might be bracing for a good

old-fashioned fight over defense spending, reminiscent of the Reagan-Bush years. The parameters might be narrower this time, with a general consensus

that total spending should continue to fall from previous levels. Still, it

seems likely that at least $ 10 billion will be in dispute as Congress debates

the fiscal 1995 defense budget.

The question is, what comes first? In the Reagan years, the White House

seemed to set its defense budget before thinking about how much domestic

spending was affordable. Clinton, who ran on an almost-solely domestic

platform, clearly approaches things differently. In that sense, he's the mirror

image of his predecessor, who was widely criticized for ignoring domestic

matters.

"Setting the defense number used to be one of the first things we did," says

the Concord Coalition's Phillips, former Republican staff director at the House

Budget Committee. "Now, the tables have been turned. It seems like setting the

domestic number comes first."

But political concerns could prevent Clinton from concentrating on domestic

spending first. His own vulnerability on draft-avoidance charges, and the

public's skepticism about the trustworthiness of Democrats in general on defense

issues, may prompt him to assure critics that he will protect the Pentagon.

The Domestic Side

Though no executive branch agency can be very happy with the fiscal

realities, Clinton's budget process has not been as adversarial as it might have

been.

Last summer, a Panetta directive about potential deep domestic-spending cuts

attracted much publicity. If Clinton's full agenda of "investments" were funded

for fiscal 1994, it said, the Administration would have to cut existing programs

10 percent to bring spending in line with statutory limits.

Then came the 1993 budget deal, essentially freezing total discretionary

spending and forcing the Administration to kill, or cut deeply into, old

programs in order to finance new ones. Panetta has said recently that hundreds

of programs will be cut and hundreds more frozen at current levels.

Panetta attempted to instill a new spirit of cooperation in the agencies with

the budget process. During the summer, he met with Cabinet Secretaries to

discuss agency needs and fiscal realities. Then he moved the date by which

agencies had to give OMB their budget requests back to Oct. 1, from Sept. 1.

Seeking to put a better face on things, OMB even ceased using the venerable

term "passback" to describe its final decisions on agency spending, usually

rendered on the day before Thanksgiving. Instead, it talked in less

heavy-handed terms about "recommended spending levels."

But by the time domestic agencies submitted their budget requests to OMB in

October, they had asked for a total of $ 23 billion more than was allowable.

Excessive spending requests are hardly new, but they didn't make life easy for

Clinton, who chose to play a more active role in budget-making than his

predecessors.

In previous years, OMB and the agencies worked out their differences through

a series of informal conversations and formal review sessions. OMB's budget

examiners met with low-level budget makers in agencies, OMB's branch chiefs met

with higher-level civil servants, OMB's political aides met with their

counterparts in the agencies, and OMB's director met with Cabinet Secretaries.

In addition, Cabinet Secretaries could appeal to senior White House officials

for more money. Only when all other options had been exhausted would Cabinet

secretaries -- rarely -- take their cases to the President.

This time, however, Clinton chose to shape the internal debate more directly.

Starting after Thanksgiving and stretching well into December, he heldindividual budget sessions with Cabinet secretaries and aides on each side. But

Panetta and Robert E. Rubin, who directs the President's National Economic

Council, sent agency heads a memo asking them not to appeal again to Clinton

after they received final budget allocations for their agencies.

Before long, the press began writing ominously about a Cabinet revolt against

the budget. In reality, resentment was more muted, and at least some of it was

probably put on for public relations purposes -- to assure agencies'

constituents that their interests were being forcefully represented.

Some agency heads, though, were genuinely distressed about their budgets.

One was Secretary of State Warren Christopher, who sought about 20 percent more

than the approximately $ 19.5 billion that OMB had suggested. He talked

directly to Clinton, arguing that the President could not carry out the foreign

affairs agenda that he himself had outlined without the requested increase.

High officials at State and the Agency for International Development made thinly

veiled suggestions that cuts in the budgets of U.S. intelligence agencies could

finance their own agencies' needs.

Veterans Affairs Secretary Jesse Brown was angry as well. He sought more for

his department's medical care program. More significantly, however, he feared

that health-care reform would bring about the demise of the veterans' separate federal medical establishment.

Nowhere did the trade-off between new and existing programs seem more obvious

than at the Department of Health and Human Services, where Secretary Donna

Shalala sought to raise her department's budget allocation by at least $1 billion. HHS was home to more of Clinton's proposed "investment" programs than

any other department. But Shalala wanted funding for not only those

investments, but also to protect HHS's plethora of existing programs.

While they fought one another, the Secretaries also sent a unified message of

sorts: that they should not have to absorb many, if any, of the federal

personnel cuts that Clinton had promised the American people.

Clinton had pledged to cut 100,000 federal jobs by 1995 and then, in Vice

President Gore's National Performance Review (NPR), to cut another 152,000 by

1999. But with new programs such as national service, proposed new

"investments" and bold plans for health-care and welfare reform, the President

was asking his executive branch to do more, not less.

Nobody wanted to volunteer staff reductions. In fact, most secretaries asked

for more staff positions, recalls one budget insider. While paying lip service

to the idea of downsizing, nearly everyone argued that the burden should falelsewhere, in agencies with less urgent needs.

The Secretaries' stands reflected the staffing needs reported by agencies

within their departments. For instance, HUD Secretary Henry Cisneros proposed a

plan to reduce staff at HUD. But his agency's Federal Housing Administration

says it needs more people to handle loan defaults on multi-family projects.

The task of reducing agency head counts has been complicated by the

Administration's proposal for early-retirement bonuses of up to $ 25,000, which

has brought attrition to a virtual standstill. Many workers who might otherwise

have helped the Administration reach its first goal of 100,000 cuts have chosen

to wait to see if buyout legislation passes Congress.

Referring to the buyout proposal, an NPR official acknowledged that as long

as the proposal is pending, "everybody gets glue in their shoes. Once it

passes, there's going to be a pell-mell rush."

Target: Workers and Agencies

The buyout problem points up another reality that a deficit-conscious

Congress has sidestepped or forgotten: The NPR's personnel recommendations are interrelated with some of its other proposals. In particular, they are

predicated on changes in the existing command-and-control structures that govern

federal work. Without those changes, staff cuts would probably make

government's problems worse.

David Osborne, co-author of Reinventing Government (Addison Wesley, 1992) and

an NPR senior advisor, made that point in a response to remarks last November by

Sen. Pete V. Domenici, D-N.M., at a luncheon sponsored by the National Academy

of Public Administration. Forcing staff cuts with out making the other changes

would realize the NPR's "worst nightmare," Osborne said. Domenici, the Senate

Budget Committee's ranking Republican, predicted the nightmare would become a

reality.

He had good reason to say so. By late 1993, lawmakers who wanted to reduce

the deficit or finance pet projects fixed their eyes on the job cuts. The

Penny-Kasich bill included the 252,000-job reduction and proposed applying the

approximately $ 27 billion in savings to deficit reduction. So, too, did Sen.

Kerrey's five-year, $ 109 billion deficit reduction plan.

But rather than save the money, Congress likely will spend it. Early in

1994, in fact, lawmakers are expected to pass a major anti-crime bill, financed

in part with the savings from the 252,000-job reduction. Years of government-bashing by Presidents and other politicians have rendered

federal workers an easy target.

So, in addition to eliminating jobs, lawmakers

are taking aim at them in other ways. The Penny-Kasich plan, for instance,

proposed raising the retirement age for all new federal workers, delaying

cost-of-living adjustments on retirement benefits for all new enlistees into the

armed services and reducing benefits from the federal Thrift Savings Plan for

new federal employees.

Agency operating budgets provide another easy target for a cash-starved

Congress. The Penny-Kasich legislation called for a 5 percent cut in funds for

the Executive Office of the President, a one-year, 15 percent cut in travel

allowances for most executive branch agencies, and various other measures --

including a 7.5 percent cut in legislative branch spending.

Kerrey's legislation included similar cost-saving measures and would freeze

spending on federal agencies' overhead -- travel, shipping, phone, printing,

rent and other capital assets -- for two years, then provide increases only to

cover inflation for the next three. Defense agencies and postal services would

be exempted.

In a five-year, $ 51 billion package of spending cuts he recently proposed

with nine other GOP senators, Minority Leader Robert Dole of Kansas called for a 7.5 percent cut in appropriations for the Executive Office of the President

and for Congress, and $ 3 billion in savings on federal overhead.

The fate of these proposals remains unclear, of course. But federal workers

seem likely to continue facing cross-cutting pressures. Even if the

Administration pushes proposals contained in the National Performance Review to

empower workers, budget pressures may prompt Congress to stay focused on how to

squeeze money from personnel accounts.

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