President plans tax cuts to woo middle class

In an attempt to pre-empt the Republicans and silence critics in his own Democratic ranks, a beleaguered President Bill Clinton is to make a national prime-time address tomorrow in which he will propose tax cuts for the middle class and set broad policy targets for the last two years of his term.

Decided only after much hesitation, the speech from the Oval Office will be critical in an effort to demonstrate that the Republican mid-term election landslide has not turned Mr Clinton into a lame duck. It will allow him to have his say before the new Republican-controlled Congress assembles on 4 January and launches a salvo of legislative proposals that could consign the President's State of the Union message later that month to virtual irrelevance.

It was far from clear yesterday whether the speech would make the impact Mr Clinton desperately seeks. Without the guarantee of detailed and newsworthy proposals, the major television networks may not even carry it. Even on the tax-cut issue, over which

the President has been closeted with advisers all week, the specifics were still not clear last night.

A tax cut would make good the most notorious unkept promise of Mr Clinton's election campaign, that he would help the middle- and low-income earners who had been "shafted" during the Reagan-Bush era. But he jettisoned it even before he took office, claiming the budget deficit was far worse than expected.

But with Republicans clamouring for even bigger tax and spending cuts of their own, the White House had no choice but to act. The favoured option is a tax credit on children for those earning up to $75,000 (£50,000) or $100,000, costing $40bn to $50bn over five years.

The problem is how to pay for it. Reductions in Medicare and Medicaid, and cutbacks in government that might truncate some departments, are solutions being canvassed.

The Republicans have no such inhibitions. Amid vague talk of sweeping spending cuts, they are calling for a $500 tax credit per child on earnings of up to $200,000 and pressingagain for a cut in the capital gains tax. In all, the "Contract with America" manifesto of House Republicans contains reductions worth more than $200bn.

Hence the risk of a tax-cut bidding war between the two parties, which is already causing jitters on financial markets. Most economists argue that the last thing the surging US economy requires is a fiscal stimulus that would probably increase the deficit, push up inflation, and force the Fed into more severe action on interest rates.

But with the unofficial start of the 1996 campaign just weeks away, political rather than economic considerations are likely to prevail. A tax cut would be another sign of Mr Clinton's lurch to the right - his supporters would say to the centre - as he scrambles to win back the middle ground of America.