Clinton reverses into path of big business: The President has gambled all on radical plans to slash the budget deficit, but US industry is threatening to fight him all the way. Bailey Morris reports from Washington

ON WEDNESDAY, President Bill Clinton made what must rank as the greatest political U-turn of recent times. After winning an election on the promise of tax cuts, he proposed one of the largest tax increases in US history.

A day later he travelled to the Hyde Park, the New York home of Franklin D Roosevelt, to make a symbolic statement.

Like FDR in 1935, Mr Clinton is challenging the powerful US financial and business establishment by taking away many of its treasured perks. In the spirit of FDR, he used his first State of the Union message to fight for a more equitable distribution of income to narrow the growing gap between rich and poor.

It is a huge gamble. Wall Street and most of US industry have already indicated their hostility to the programme, but Mr Clinton is taking the plan straight to the people. If the people back him, business will have to bow to the inevitable. If they do not, Mr Clinton's political credibility will be shattered.

The first economic blueprint of his presidency sends a message of austerity, populism and possible near-term pain. He himself acknowledged that it was not the 'morning in America' of the last 12 years of Republican presidents but a dramatic change of direction.

'We have to play with the cards we have been dealt,' he said in urging a reversal of 'disturbing' US economic trends. In a televised address to a joint session of Congress, he asked Americans to accept more than dollars 253bn ( pounds 176bn) in new taxes over the next four years to curtail the record annual US fiscal deficit of dollars 300bn. In addition, spending on existing federal programmes would be cut by dollars 247bn during the same period.

Mr Clinton's objective is to reduce the deficit to below dollars 200bn by 1997 - or 2.7 per cent of US GDP from the current rate of 5.4 per cent. It is the most courageous attack yet launched against the burgeoning US structural deficits that have left America with the lowest national savings rate of any big industrial economy.

No one, with the exception of the very poor, would be spared the pain, including the middle-class voters who had helped elect Mr Clinton on promises of a tax cut. The proposals would place the heaviest burden on those who fared best under the Republican tax policies of the 1980s: 60 per cent of the tax increases would fall on the 2 per cent of US families with incomes above dollars 200,000. Even so, the top marginal rate of 39.6 per cent will only begin on incomes of above dollars 250,000, a more generous rate and threshold than in any European country. By spreading the pain across the population, 55 per cent of US families would pay more tax under the Clinton plan. Families with annual incomes of dollars 40,000 would face additional fees of dollars 118 a year or 4 per cent more a year. In addition, the top corporate rate would rise from 34 to 36 per cent.

There are three main elements in the Clinton programme: deficit reduction through tax increases and spending cuts, including an additional dollars 76bn from defence; a dollars 30bn short-term stimulus programme of new spending on public works and employment projects to create 500,000 new jobs by 1994; and a dollars 160bn investment programme over four years that includes a temporary investment tax credit for big firms and a permanent one for small businesses, in addition to new urban enterprise zones and new spending on technology and environmental programmes.

Mr Clinton stressed that, unlike his Republican predecessors, he had used 'real', unfudged numbers and no gimmicks in projecting future budget-reduction gains. He urged Congress to pass his budget programme in its entirety to return America to a long-term growth track and reverse the sharp decline in living standards since the late 1970s. If the US failed to act, 'you will not recognise America 10 years from now when the deficit will have grown to dollars 635bn a year', Mr Clinton warned.

Such salesmanship is necessary in the US system, which, unlike a parliamentary government, does not give a president the luxury of seeing his budget passed as presented. Congress has the authority to approve and change it and almost always does the latter.

So can this programme be passed? Initial comments from the Republican opposition and from an array of business and other special-interest lobbies were not encouraging. In presenting the official Republican response, Robert Michel, the House minority leader, denounced what he saw as a typical big-spending Democratic programme that 'soaked' the middle class through tax increases and clearly reversed Mr Clinton's campaign promises.

A number of industries, such as construction companies and manufacturers of hi- tech equipment, stand to gain substantially from the proposals. But more expect to be losers. An army of special- interest lobbies has already begun to form coalitions to fight the programme.

The National Association of Manufacturers held meetings in Washington to determine its strategy in fighting the rise in corporate taxes. Energy companies - large and small - lined up against the new energy tax (a BTU tax calculated on the heat content), and oil-producing states, which would be hit harder, squared off against coal-producing states which did better due to the absence of a new carbon tax.

There are so many bits and pieces of the programme to attack that it could founder because of its enormous complexity.

Mr Clinton, however, is desperate to court business and investor support before opposition becomes too entrenched. All the last-minute changes to his State of the Union message last week were designed to reassure corporations that there would not be an anti-business environment over the next four years.

Following the announcement of the programme, Mr Clinton and his cabinet launched a promotional blitz to win the support of US business. Robert Rubin, head of the new White House economic council and a former top official at the investment bank Goldman Sachs, was immediately dispatched to Wall Street to allay the fears of investors. He preached a message of lower interest rates. He pointed out that bond markets had reacted favourably to the programme and that long rates had come down. If Mr Clinton's plan was successful and the trend continued, he said, long bond rates would fall to very low levels, creating one of the most favourable investment climates in decades.

The initial signs, however, were that the administration was failing to win the hearts and minds of the markets. Earlier in the week, in response to an outline of Mr Clinton's plans, the market plummeted by 83 points in its biggest one-day decline since November 1991. The less excitable voices in New York point out that the stock market almost always falls in the first year of a new president. Nevertheless, the size of last week's fall has to be taken as a damaging vote of no confidence in the measures.

And despite applause for deficit reduction, the business community remains sceptical about Mr Clinton's overall plan. Some executives believe the proposed rise in corporate taxes is coming at the wrong time in the business cycle, when the US economy is showing signs of an encouraging 3 to 3.5 per cent rebound based on the last quarter's results. One immediate impact would be a decline in corporate earnings this year because of mandatory provisions against future tax liabilities.

The Valero Energy Company estimated, for example, that it would take a one-off charge of dollars 16m against earnings this year to reflect the Clinton programme. Others fear that the impact on small business of measures under discussion - including mandatory health benefits, worker retraining, family leave and a higher minimum wage - could be highly negative. The overall short-term response is likely to be continued declines in financial markets.

Businessmen also objected to the populist tone of Mr Clinton's remarks against executives earning more than dollars 1m a year, the highly paid lobbyists who represent them in Washington and against the subsidised private club dues and entertainment expense accounts they enjoy.

But there are dangers for foreign companies exporting to the US, too, since Mr Clinton's need to pacify the business lobby could produce protectionist results. In return for asking US industry to pay higher taxes, it is feared the President may resort to bribes in the form of new import restraints for specific industries and new forms of hidden subsidies for those industries he considers critical to US economic security. The airline, motor and pharmaceutical sectors are likely to be in the forefront of those looking for such a deal in return for their support for the new tax measures.

The secretary-general of the Confederation of British Industry, Howard Davies, and his deputy, Sir Michael Angus, are travelling to Washington on Tuesday to tackle US administration officials on the protectionism issue. But they also want to clarify the question of US taxation on foreign companies.

In his campaign, Mr Clinton suggested he would tax overseas businesses to the tune of dollars 45bn. Now he is saying it will be closer to dollars 3.8bn, but others in the administration are still sounding hawkish. As Britain is the largest foreign investor in the US, with more than dollars 100bn at stake, Mr Clinton's intentions are clearly crucial to UK companies.

With stakes this high, it is small wonder that Mr Clinton's programme is being described in the US as the most important economic policy address since Ronald Reagan's in 1981.

If he gets the long-term aspects right, he may indeed succeed in placing the US economy on track for a new 'golden' period in which the underlying rate of growth - which has risen little if at all since 1981 - again bounces forward. The result would be a reversal of the growing inequality in US income distribution, which has taken hold since 1973, and a more robust improvement in productivity.

But medicine this strong rarely tastes good. The financial and business community has curled its lip at Mr Clinton's plan. It doesn't like it much and will fight to avoid it.

(Photographs and graphs omitted)