Hopes raised of end to US budget deadlock

RUPERT CORNWELL

Washington

After three days of stalemate, rancour and another partial government shutdown, President Bill Clinton and Republican leaders in Congress vowed last night to make a final bid to agree by the end of the month on a plan to balance the budget in seven years.

After a "useful and constructive" two-hour meeting in the Oval Office, the Senate majority leader, Bob Dole, and Newt Gingrich, the House Speaker, announced they would meet the President again today to work out a detailed schedule. If that can be done, then Congress will quickly pass a stop- gap spending bill, allowing the 260,000 government workers laid off since the weekend to return to work.

Even so, and despite the guardedly upbeat language of Mr Gingrich and Mr Dole, there was no guarantee of ultimate success. "Everything will be on the table," the Speaker said, an oblique way of acknowledging that the main bones of contention - cuts in the Medicare and Medicaid federal health care schemes and the $245bn (pounds 160bn) tax cut demanded by Republicans - remain unresolved. But the two sides have agreed to use the more sober economic forecasts of the Congressional Budget Office as a basis for negotiation.

With the impasse threatening to drag on through the Christmas holidays and into the New Year, the best chance of concentrating minds and breaking the deadlock seemed to lie in a big shakeout in the financial markets, driving stocks down and interest rates higher as investors realised that the assumption of a budget deal which had underpinned the recent run-up on Wall Street might be wrong.

But Monday's 100-point fall on Wall Street made little impression on Mr Clinton yesterday. As he vetoed another of the 13 spending or appropriations bills sent him by Congress for the 1996 budget, the President said there "will always be such changes in a vibrant market economy". The Federal Reserve yesterday unexpectedly cut a key short-term lending rate by a quarter of a point, pushing bonds and shares higher.

In another sign of business unease, the heads of 90 big corporations took out a two-page advertisement in the main newspapers to issue a "bipartisan appeal" to Republicans and Democrats. But although the outline of a bargain has long been obvious, in the shape of bigger spending cuts than offered by Mr Clinton, and Republican acceptance of a far smaller tax reduction, huge obstacles remain. A phalanx of younger conservative House Republicans oppose any compromise while, with the 1996 election less than a year off, the President must look to his own base.

Indeed, the suspicion is widespread that the White House wants no settlement other than entirely on its terms, in the calculation that the defence of Medicare and Medicaid from "heartless" Republicans would make an ideal election platform.

Yesterday Mr Clinton received a further boost with the backing, albeit grudging, of Democratic moderates who had been toying with sponsoring an independent challenge for the White House next year. The only factor which would change their loyalty, they hinted after a strategy meeting in Minneapolis, was if Mr Dole, the likely Republican nominee, took Colin Powell as his running mate. Mr Dole suggested as much at the weekend, but the former general has reiterated he was not interested in the vice- presidency.

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