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War Will Boost Deficit by More Than $15 Billion, Darman Says : Economy: The budget director says the allies have pledged $51 billion to the effort, but loans obtained by the U.S. government will make up the difference. He also repeated that the Administration will not ask for a tax increase.

February 04, 1991|JAMES RISEN | TIMES STAFF WRITER

WASHINGTON — The Bush Administration expects the Persian Gulf War will add at least $15 billion to the soaring deficit in the 1992 federal budget, a senior Administration official said Sunday.

Richard Darman, director of the Office of Management and Budget, said that although America's allies so far have pledged to pay $51 billion, the rest of the war's costs will have to be financed with loans obtained by the U.S. government.

He also reiterated that the Administration has decided not to seek a temporary tax increase to help pay for the conflict.

Darman's comments, on NBC's "Meet the Press," were the first by the Administration to detail how much of the war's initial costs will be included in the fiscal 1992 budget President Bush will unveil today.

The White House is forecasting that the deficit in the 1992 fiscal year, which begins next October, will total $281 billion, down slightly from the $318-billion deficit expected in the current 1991 budget.

The full cost of the war has not been included in the Administration's deficit forecasts, however, because the White House and Congress have been waiting to see how much of the tab will be picked up the allies, especially Japan and Germany.

Darman said the $15-billion war cost figure included in the 1992 budget is a rough estimate of how much extra the United States will have to pay after it has received all the contributions expected from around the world. Those costs will spill over into the 1992 budget even though the White House expects the war to be over long before the next fiscal year begins.

"We are going to include in the budget about $15 billion worth, initially, at least as a place-holder for what might have to be the U.S. contribution," Darman said.

"Whether we have to do more depends on how quickly the war ends," he added. "But if the war ends anywhere near the period where people are assuming, and foreign contributions hold up, I would hope we shouldn't have to go much above that. We wouldn't have to do taxes, and the borrowing is already built into the deficit" forecast included in the budget package.

The $51 billion in allied pledges given by Darman represents a $10-billion increase over earlier Administration estimates. However, only about $5 billion in cash has been received by the Pentagon.

The pledges are designed to help pay for a three-month war. If the war lasts longer, the Bush Administration will have to negotiate new deals with the allies or increase the percentage of the costs paid by the United States.

In addition to the deficit, the war is also expected to damage the outlook for the overall economy if it lasts more than a few months. Most notably, Federal Reserve Board Chairman Alan Greenspan seems increasingly concerned about the war's impact. Until recently, Greenspan seemed optimistic that the worst of the recession was over and that the credit crunch that had hit the American banking system seemed to be easing.

But last week, Greenspan warned that a deeper recession would result if the war lasted more than three months. On Friday, after a sharp rise in the January unemployment rate suggested that the economy was still quite weak, Greenspan's Fed moved aggressively to try to jump-start the economy by slashing two key interest rates.

Most economists still believe that the recession will end by midyear, and the White House is poised to release its own economic forecast this week, predicting that a relatively mild recession will be over by summer.

Meanwhile, Darman said the new federal budget will attempt to cut back on a range of entitlement programs, including those benefiting the affluent. The budget will seek some additional cuts in Medicare funding, to be spread over the five years covered by last fall's deficit-reduction agreement. The Administration has failed to win such cuts in the past, and a fierce fight over the issue is again likely in Congress.

Darman insisted, however, that Medicare cuts will be aimed at reducing the fees paid to hospitals and doctors and will not attempt to reduce the level of coverage provided to recipients.

"Overall, beneficiaries are not the target of our cuts--doctors perhaps, and clinical labs--but not beneficiaries," he said.

Darman added that at least some entitlement cuts will be less controversial among Democrats because they will represent reductions in benefits to the wealthy. He did not detail what programs he meant but seemed to be referring to benefits such as Medicare payments available to the elderly regardless of their financial situation.

"It will be somewhat ironic if the Democrats, who are expressing concerns about fairness, are reluctant to reduce the subsidies for the wealthiest Americans," Darman said.

He also said the Administration will present today two different initial estimates of the budgetary impact of a White House proposal to cut capital gains taxes--but said neither estimate shows the tax cut reducing federal revenues.

Democrats have argued that a capital gains tax cut will bust the budget while also providing a sop to the rich. They were able to keep a capital gains cut out of last fall's budget agreement, but Bush has risked breaking that agreement by reintroducing the proposal almost immediately.

In order to determine the actual cost to government of a capital gains cut, Greenspan has agreed to lead an Administration study of its budgetary impact. His study will be used by the White House as the final arbiter of the cost of such a tax break, thus determining whether the Administration believes the change can be made without breaking the budget.

But many congressional leaders believe that Bush's decision to ask Greenspan to study capital gains means that the Administration is not serious about pushing for the tax break this year and is reintroducing it as a way to placate the conservative wing of the Republican Party.

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