Clinton budget sails into battle with Congress and deficit: 'First stage' dollars 1,500bn package raises taxes and cuts defence spending Republicans promise to fight it all the way

THE CLINTON administration yesterday presented a dollars 1,520bn ( pounds 1,020bn) budget for next year, containing sizeable tax increases and a trimming of defence spending - the first stage in its plan to reduce the federal deficit to dollars 200bn or less by 1997. But the Republican opposition in Congress signalled its determination to fight the proposals all the way.

Simultaneously, worrying new economic figures were published, suggesting that inflation may once more be gathering pace, and that the modest recovery in progress since the middle of last year is doing nothing to lower the country's 7 per cent inflation rate.

The fiscal 1993/94 budget which the President formally sent to Capitol Hill yesterday, projects a drop in the overall deficit next year to dollars 264bn from the 1992/93 shortfall of dollars 322bn bequeathed by the Bush administration. The improvement primarily reflects revenue increases from higher income taxes on the wealthy, higher social security taxes, a new across-the- board energy tax, and a dollars 14bn cut in the Pentagon budget.

'This is the first step in a major change of direction for the country,' said Leon Panetta, the White House budget director, yesterday, echoing the insistence of President Clinton that his first detailed budget would 'restore hope in the hearts of the American people'.

The blueprint presented by Mr Panetta states that if Congress holds to the five-year deficit plan, whose outline it approved last month, the federal deficit will fall to dollars 205bn by fiscal 1997/98. If the economy grows at the slightly higher pace forecast by the administration and long-term interest rates stay close to their current historic lows, the deficit could come down to dollars 160bn - in other words, the halving promised by Mr Clinton.

The administration insists its assumptions are realistic: 'If there are surprises, they'll be positive ones as long as our programme is enacted,' said Laura Tyson, chairman of the President's Council of Economic Advisors, claiming the administration had gone out of its way to avoid 'rosy scenarios'.

The budget projections are based on forecasts of 3.1 and 3.3 per cent growth in 1993 and 1994, and 2.5 per cent annual expansion thereafter. But even if these modest prophecies come true, unemployment will still run at 5.7 per cent in 1997, higher than on the eve of the 1991/1992 recession.

Jobless claims in the first week of April fell only 9,000, far fewer than expected, while the four week average of new claims hit a post-election high. Factory-gate producer prices rose 0.4 per cent in March, for the second month in a row.

The Republicans have already flexed their muscles in a Senate filibuster that seems certain to force Mr Clinton to scale down his separate dollars 16bn short-term stimulus package if it is to reach the statute-book this summer.

But the long-term goal of the White House is unchanged. According to Mr Panetta, the five years of tax increases and spending cuts will bring in dollars 700bn gross, offset by around dollars 200bn of spending increases, leaving a net saving of dollars 500bn. Defence spending alone between 1994 and 1998 will drop at least dollars 114bn: in fact, many Democrats seek more drastic cuts.