President to outline plan on US economy

IN THE SPEECH that may shape his presidency, Bill Clinton will this week lay out his plan to revitalise the United States economy - a modest stimulus to boost jobs and longer term growth, overshadowed by a mixture of tax increases, spending cuts and probable caps on health-care costs which could save up to dollars 550bn ( pounds 400bn) between now and 1997.

Mr Clinton was still working out the final details this weekend. But whatever last-minute changes emerge, Wednesday night's address to a joint session of Congress will be the most important presidential statement of economic policy since the day, almost exactly 12 years ago, when Ronald Reagan launched the supply-side doctrine that bears his name.

Not only will the President's proposals, heralding a new era of government involvement in the economy, bring down the final curtain on Reaganism. Equally important, the occasion is a chance Mr Clinton will never again enjoy to show that the em barrassing early fumbles, over homosexuals in the military and his search for an attorney-general, were merely a beginner's pardonable mistakes.

To sell the package, the White House is mounting an extraordinary publicity blitz. Crucial to its success is that the public perceives it as fair. Mr Clinton is toying with the innovation of returning to Capitol Hill the next morning to answer congressmen's questions - a one-off America version of Prime Minister's question-time, untried by any president since George Washington.

Even before he delivers the speech, he will go on nationwide television tonight in a fresh attempt to explain why sacrifices are needed. At the end of this week, his aides say, he will make a barnstorming tour of the Midwest and West Coast, to make his case again directly to the people.

After a fortnight of leaks and trial balloons, the broad thrust of the proposals is clear: over the longer haul a balance of cuts and tax increases to raise dollars 500bn to dollars 550bn, which the Budget Director, Leon Panetta, said yesterday would come 'close' to the goal of halving the annual federal budget deficit to dollars 145bn; and in the short term, tax cuts and spending increases that would pump around dollars 30bn into the economy.

The cuts include an extra dollars 8bn from defence in 1993-1994, with more to follow, a probable scaling back of 'big-ticket' projects such as a manned space station and the atom-crushing 'super-collider'; dollars 9bn of reductions in the cost of government; and caps on automatic health-care entitlements for the elderly rich. This last, officials say, will save at least dollars 35bn over the next four years.

On the tax-increase side of the equation, the top tax rate for individuals earning more than dollars 200,000 will rise from 31 to 36 per cent, while annual incomes of more than dollars 1m would be hit by a further 10 per cent surcharge. For the rich, too, tax on social security benefits will be increased.

The top rate of corporate tax will go up from 34 per cent to 36 per cent cent, while a host of executive perks and loopholes will be eliminated. Most unpopular of all, though, will be the energy tax, which seems all but certain. By bearing on all sections of the population, it will be a de facto reneging by Mr Clinton on that notorious campaign pledge to lower taxes for the middle classes.

By comparison, the dollars 30bn short-term stimulus - mainly investment tax credits and capital- gains tax cuts for small businesses and a dollars 16bn boost in spending on job training and infrastructure programmes - is small beer for the economy as a whole. Only 200,000 new jobs will be created, White House officials admit.

A key part of the plan will be its presentation as an assault on the traditional ways of Washington and its entrenched special-interest groups. 'A lot of the special-interests are going to be very unhappy with what we're doing,' said Al Gore, the Vice-President.

Republicans are already grumbling at the focus on tax increases rather than spending cuts. And the public itself is far from united behind Mr Clinton: according to a new Time/CNN opinion poll, his 'unfavourable rating' is 32 per cent, exceptionally high at so early stage of an administration.

Many serious economists have their own objections too, arguing that with growth now running at 3.5 per cent, no further stimulus is needed. Mr Clinton claims too few jobs are being created. But his critics insist this is the healthiest sign of all: proof that the economy is being driven forward by higher productivity.

(Photograph omitted)

Peter Pringle's America, page 19