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BusinessWeek: January 11, 1993 |
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Top of the News
CALIFORNIA HAS A HARD LESSON FOR CLINTON His economic summit was a smash. His Cabinet choices have been popular. Even his sober remarks about cutting the federal budget deficit are winning praise. But as President-elect Bill Clinton packs his bags for Washington, he may want to look over his shoulder toward California. There, another first-term chief executive, Republican Pete Wilson, has learned just how obstinate a runaway deficit can be. Like Clinton, Wilson came into office confronting the twin evils of a sluggish economy and an uncontrollable budget deficit. And on both fronts, Wilson continues to lose ground. On Jan. 8, barely four months after closing a $14.3 billion gap, Wilson is expected to tell battle-weary state legislators that they'll have to contend with at least $7.5 billion more in red ink for next year. And Wilson wants them to balance the budget without new tax hikes. "Given the economic climate, we can't afford to lose more jobs," Wilson told reporters. "Therefore, we can't afford tax increases." RISKY ROAD. Sound familiar? Fearful of stilling the rustlings of a national economic recovery, Clinton has said that, despite the huge deficit, he won't propose hiking the corporate tax rate to match the 36% rate he wants to charge the nation's wealthy. Meanwhile, his advisers now think he can raise just half the $45 billion he had hoped to add over four years with taxes on foreign companies with U.S. operations. That puts Clinton, like Wilson in California, on the politically dangerous path of slashing spending for programs that have settled into senior sacrosanct status in both Washington and Sacramento. Clinton, for instance, is said to be eyeing cuts to Social Security, either by extending retirement ages or with added taxes on wealthy recipients. That's likely to be as successful as Wilson's effort to tap the powerful California state employees' pension fund. Wilson trashed the idea. The governor hasn't had much help in making the hard cuts from California's legislature. After campaigning on promises that he would add funds to state programs for prenatal care, for instance, he pushed to slash welfare payments to mothers. The proposal was ignored by the Democratic-controlled state assembly. Even state Republicans eventually turned on Wilson, rebelling when he finally agreed to raise $7.2 billion in new taxes last year. The Democratic love-in that awaits Clinton puts him ahead of Wilson. Even so, Clinton has to be careful not to offend powerful public interest groups. One likely flash point: a potential plan to set a ceiling on the amount of tax-free health-care coverage employers can provide to workers. That will raise about $48 billion over four years but also may irk many businesses. Even if Clinton walks the political tightrope better than Wilson, he faces some daunting arithmetic. After years of whittling spending programs, state and federal budgets now have little room to make substantial cuts without inciting major political fights. That means Clinton may find himself resorting to budgetary sleight of hand. Wilson is familiar with such tricks: The governor and Democratic legislators resolved a two-month-long budgetary stalemate this summer by making a $973 million "loan" to the state school system and a $580 million deferral of tax refunds owed to defense contractors. To cut further, Wilson will have to dig into programs for schools and prisons, where funds are allocated by law (chart). Clinton, too, confronts huge uncuttables: $917 billion of the $1.5 trillion fiscal 1993 budget goes to interest payments and such mandatory spending programs as Social Security and medicare. TURNABOUTS. Clinton may be hoping that his budget gets a boost from a recovering national economy. Nevertheless, revenue slowdowns, combined with higher entitlement payments and the more-expensive-than-anticipated savings and loan bailout are pushing up deficit projections. Wilson is facing a similar turnabout from the forecasters: California has lost 120,000 more jobs than state number-crunchers predicted just nine months ago. That will cost the state $2 billion in tax revenues and add billions in welfare and medical payments. Wilson tried unsuccessfully to get around his Sacramento roadblocks by taking his case to the public. But voters rejected his ballot initiative to slash welfare payments by 25%--which would have saved $1.4 billion annually. In February, Wilson and Democratic legislators are planning to mimic Clinton's economic summit with one of their own. Given the Golden State's record, though, Clinton isn't likely to return the favor by taking accounting lessons from Sacramento. | |
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