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Clinton's $388bn spending cuts

President Bill Clinton yesterday sent Congress a $1,700bn (pounds 1,040bn) budget for fiscal 1998, based on forecasts of a continuing robust but low-inflation economy over the next two years that will help pave the way to a balanced federal budget by 2002.

"I support a balanced budget, I propose a balanced budget, and we have the best chance in a generation to achieve one," Mr Clinton said as he presented his plan that aims at $388bn of savings over five years.

It proposes tax cuts of $98bn over five years, mostly directed towards education and a $500-per-child tax credit for low- and middle-income families, offset by $76bn of revenue increases - mainly rises in excise duty and the closing of tax loopholes.

Republicans predictably criticised the package, with the House Budget Committee chairman, John Kasich, declaring the tax relief was not enough. The party wants a bigger tax credit for children, and a larger reduction in capital gains tax than the simple elimination of the tax for most home sales sought by Mr Clinton. The Republicans also say the $265bn Pentagon budget requested by the White House should be raised by $7bn.

The arguing masks a more significant truth. For the first time since 1981 a Presidential budget has not been declared "dead on arrival" on Capitol Hill. The gap between Republican and Democrat proposals is comparatively small. Though the bargaining will be hard, a deal may be struck for the first balanced budget since 1969.

The prospects for the economy meanwhile boil down to "steady-as-she goes". GDP is forecast to grow at 2 per cent in 1997 and 1998, while annual inflation will be virtually unchanged at 2.6 and 2.7 per cent, as will unemployment at 5.3 per cent this year and 5.5 per cent next. The figures comply with the Federal Reserve's 2.5 per cent ceiling for non-inflationary growth. If achieved, little change in interest rates over the next two years is likely.