US deal ensures balanced budget

In a deal that both sides described as "historic", President Bill Clinton and the Republican-controlled US Congress yesterday sealed an agreement that will ensure swift passage of this year's budget legislation and should ensure that the US budget is fully balanced by 2002. The deal, struck only days before Congress starts its summer recess, has been the subject of weeks of haggling between the White House and leading Republicans.

Balancing the budget had become a major objective for Democrats and Republicans alike, with Democrats wanting to lay to rest an image as free-spenders, and Republicans wanting to uphold the principle of financial rigour. The latter also wanted to ensure that there were funds enough not only for Mr Clinton's favoured spending projects, but also for the tax cuts they have campaigned for.

Presenting the agreement at a White House ceremony yesterday afternoon, Mr Clinton said that the budget deal would foster growth in the economy. "We have the pleasure of announcing today an historic agreement," he said, flanked by members of Congress, "that will benefit generations of Americans. After decades of deficits, we have put America's fiscal house in order."

The agreement is a triumph for Mr Clinton, who had rejected several earlier drafts because they did not incorporate some of his key election promises. The final version will provide health insurance coverage for several million children who currently have none (paid for in part through an additional tax on cigarettes), and tax incentives for students paying their way through college.

The Republicans, for their part, have obtained a cut in capital gains tax, which they argued hit middle-class home owners and their children especially hard, new tax allowances for families with children, and the promise of further tax cuts on personal income - but only in the later years of the five-year programme.

The five-year term of the deal is one of the drawbacks seen by critics of the deal - among Democrats and Republicans - who note that it spans not only next year's mid-term Congressional elections, but also the presidential elections in 2000.

If the programme is failing before then, this could affect adversely the presidential chances of the current Vice-President, Al Gore, who is necessarily associated with it, and favour one of the men emerging as his chief rival, Richard Gephardt. Mr Gephardt has not endorsed the deal. A new president with no commitment to the arrangement would also be free to scrap it - leaving the Republicans without their promised tax cuts.

One of the less pleasant aspects of the package is a new airport tax to be phased in to replace (and exceed) the current air ticket tax. The tax on international arrivals and departures could be quadrupled.

In reaching the deal Mr Clinton was greatly helped by the flourishing state of the US economy. An unusual combination of low inflation, low interest rates, low unemployment, high company profitability, falling welfare rolls and a booming stockmarket gave the negotiators more money to play with than expected.

The added bonus, for the Democrats, is that the budget process should run more smoothly during Mr Clinton's last three years as president than it did in his first term, even though they are in the minority in both Houses. The Republicans will also be happy to lose their reputation as budget-spoilers.