Clinton targets monster deficit

President Bill Clinton will use his first State of the Union address tonight to propose a harsh economic prescription of tax increases and spending cuts aimed at taming the monster federal deficit.

The speech - to be delivered, according to annual tradition, to a joint session of Congress - will lay bare how Mr Clinton intends changing the course of domestic economic policy over the next four years, notably by rejecting past tax- cutting dogma. It may define all of his presidency.

Anticipating public queasiness and resistance from some lobby groups and the Republicans, Mr Clinton and cabinet members are to fan out across the country from tomorrow to cultivate grass- roots support. The President will begin with a two-day visit to the Midwest.

Debate over the proposals had reached a high pitch yesterday after Mr Clinton revealed outlines during a national television address on Monday evening, when he admitted for the first time that he would not spare middle-income Americans from higher taxes.

Wall Street reacted badly, with share prices falling an average of 2 per cent, and bond prices turning down for the first time in weeks. Many wealthier investors, whose taxes will rise to 39.6 per cent from 31 per cent, are apparently disappointed that government-spending cuts will not account for a larger share of the deficit-reduction effort.

But the drop was played down by the President. 'Those people who came in from the business community who actually know pretty well what's in this programme have responded very positively,' he said.

He rejected Republican claims that it spelled 'raw punishment' for most Americans. 'I think most middle-class Americans, when they look at the costs plus the benefits, they're going to be much, much better off.'

A New York Times poll suggested that 54 per cent of Americans accept that higher taxes are necessary to tackle the deficit, against 43 per cent who did not. A slightly greater majority thought that he would implement tax increases in a 'fair way'.

Overall, the President is looking for dollars 500bn ( pounds 350bn) in tax increases and cuts in government spending, split roughly evenly which, according to White House estimates, should come close to halving the deficit to dollars 145bn by the end of Mr Clinton's first term. The precise spread of the increased tax burden remains unclear. Only those earning more than about dollars 175,000 are expected to pay more income tax, while an across- the-board energy tax will hit lower earners. Those earning under dollars 30,000 can expect to escape all pain.

The plan will include a modest economic stimulus package worth about dollars 31bn, divided between business tax incentives and road-building projects, aimed at creating 500,000 jobs.

In spite of Wall Street jitters, many economic analysts seemed ready to support the approach. 'If he thinks he has got the thrust of his policy right then he should go ahead and do it. He is actually being more forthright on cutting the deficit than many people would have expected and that's impressive,' said Roger Kubarych, market manager for Henry Kaufman and Co.

Geoffrey Faux, director of the Economic Policy Institute, a liberal-leaning Washington think-tank, said: 'It is a better package than I had the right to expect.' He dismissed the fall in stocks as 'manufactured hysteria' and the result of inflated stock prices.