JIM LEHRER: Last month, we examined the President's proposed federal budget. Tonight we look at the Republicans' opposing proposal. Kwame Holman begins.

KWAME HOLMAN: Simply put, the budget resolution is a suggested blueprint for how the federal government should distribute the revenues it takes in annually. Separate specific pieces of legislation then are needed to carry out the course set by the budget resolution. Nonetheless, budget resolutions are good indicators of the competing priorities between Democrats and Republicans, and forecast the political battles to come.

PRESIDENT CLINTON: This is our budget for the year 2000.

KWAME HOLMAN: President Clinton released his budget blueprint last month; House and Senate Republicans released theirs last week. Debate and votes on the competing blueprints are expected in both houses of Congress this week. The Republican proposal drawing most attention is their Social Security lock box. It's a device that would lock away the entire $1.8 trillion in anticipated Social Security surpluses over the next ten years, protecting it from being spent on other government programs.

SEN. TRENT LOTT: If we set this money aside and say this is all going to be saved, both the tax money and the interest, then it will be there for the reforms, or -- and/or it will be paying down the debt.

KWAME HOLMAN: In addition to locking away the Social Security surplus, the Republicans would increase defense spending next year by $18 billion -- that's more than the President has called for; increase education spending by $7.3 billion -- again, more than the President requested. Republicans would set aside $133 billion over ten years to ensure the solvency of Medicare, and they would kick off a series of tax cuts that would total $800 billion over ten years. Republicans claim they can do all of that and still abide by the spending caps set in the 1997 budget agreement. But to do so, it's expected spending cuts of other domestic programs totaling $20 billion will be needed. Those difficult decisions would be made later this spring by the various appropriations committees. There also are competing plans among Republicans over how best to provide the $800 billion in tax cuts. Those specifics will be hammered out by the House Ways and Means and Senate Finance Committees in late summer or early fall.

MARGARET WARNER: To analyze the Republicans' proposal, we turn to two key budget players: Senate Budget Committee Chairman Pete Domenici, author of the Senate Republican plan; and Jack Lew, head of the White House Office of Management and Budget.
Gentlemen, the last time we had the two of you on to discuss the President's plan, Jim Lehrer gave Senator Domenici the first crack, so I'm going to reverse the order right now and ask you, Jack Lew, in general, what do you make of Senator Domenici's plan?

JACK LEW, White House Budget Director: Well, in general, Margaret, President Clinton laid down a bold plan in the State of the Union that called for setting aside a large part of the surplus, 62 percent for Social Security and 15 percent for Medicare. At the time, the Republican plans were calling for tax cuts that would have used the entire surplus. We're very pleased that we're making progress towards the kind of plan that the President called for. Setting aside the 62 percent for Social Security seems to be a given now. We're disappointed that the debate over Medicare has not advanced as much as the debate over Social Security, and, in particular, we're concerned that if a tax cut is paid for first and the Medicare portion of the surplus allocation waits for later, we're afraid it just won't be there. We think that's an important debate, and it's an important debate to have at the very beginning of the process.

MARGARET WARNER: Senator Domenici, do you agree with that basic -- with Jack Lew's assessment of the basic difference, that it's really a question of whether there should be a tax cut or saving more for Medicare?

SEN. PETE DOMENICI, Chairman, Budget Committee: Well, first of all, the President sets aside 62 percent of the surplus that belongs to Social Security; we set 100 percent aside. We believe that every penny of it should be there. They spend $158 billion of the Social Security surplus in the first ten years for programs. We don't believe that's right. Secondly, all this talk about what they're doing for Medicare -- let me explain to you: In our budget, we spend $200 billion more on Medicare than they do. They cut $10 billion out of Medicare where they cut; we don't. In addition, we put $133 billion under a Senator Snowe amendment in a reserve fund, set it aside where it can be used for Medicare, including prescription drugs. Now, let me tell you the real, real problem with the President's budget. You people out there, especially seniors, you think he paid for prescription drugs. He paid for not one penny worth of prescription drugs. As a matter of fact, Mr. Lew, who's on this program, said the budget of the President does not spend any money on prescription drugs, and he doesn't intend to in this budget. He transfers 15 percent of the surplus into a trust fund and takes back IOU's, which only this administration can understand; nobody else can. So we think our budget is a good one. We don't spend all of the surplus on tax cuts. 100 percent of Social Security is put in a lock box, which incidentally, the administration's even objecting to our lock box. In addition to that, we do not -- we set up Medicare as I've just described it waiting around for a bipartisan solution, which we could have had already had the President been a player. He sat on the sidelines. Now we're anxiously waiting for his plan. He has none; he's submitted none. We say taxpayers have paid too much in taxes. So after we've done these things that I've described, all of which are good for America, good for our seniors, we then say give back the American people over a decade $750 billion in taxes. Give it back to them; they overpaid. And we leave it up to later committees, because it's not our responsibility. We think the marriage tax penalty - that fixing that should not wait 15 years like the President suggests we wait 15 years for tax cuts.

MARGARET WARNER: Okay. You laid a lot of things out there, and let me see if with Jack Lew I can first address this question of the surplus. And correct me if I'm wrong, Mr. Lew, but as I understand it, there's the Social Security surplus, which for years the government's been using to mask the operating deficit, but at some point later this year, even the operating deficit is going to come to the break-even point, and we're actually going to have a surplus in the regular budget, is that right?

SEN. PETE DOMENICI: That's right.

JACK LEW: Well, we haven't yet made a projection of one for this year, but in the very near future.

MARGARET WARNER: Okay. Here's my question, because I want to get this clear: Is the President proposing after this point to continue using any of the Social Security surplus to pay regular operating expenses?

JACK LEW: What the President's proposed is a 15-year plan where over 15 years there would be more money going into the Social Security Trust Fund than the amount of the Social Security surplus. I think that we can get confused by going through the year-by-year or the 10, 15 year totals. The real point is what are we going to be doing with this very special opportunity to spend the surplus, to allocate the surplus?

MARGARET WARNER: I'm sorry. Which surplus are you talking about?

JACK LEW: I'm talking about the entire surplus, because over 15 years, we're putting into Social Security more than the amount of the Social Security surplus. If the difference is a year-by-year difference, I think we'll work that through over the course of the process. The problem on Medicare is we've not yet reached an agreement that 15 percent of the surplus should go into Social Security. And that would be 15 percent of the non-Social Security -

MARGARET WARNER: Into Medicare, you mean.

JACK LEW: Into Medicare, that's correct. And we've not -- the President's proposed that 15 percent of the surplus go into Medicare, and that would be the non-Social Security surplus. Those are the very same dollars that would be going towards a $700 billion tax cut that Senator Domenici talked about. I think that we have to look at these as comparative plans, and there's I think no question but that the President plans does set aside more resources for Medicare. The Senator described the Senate budget as putting $133 billion aside for Medicare. We don't see where that is. The numbers just don't seem to add up. It calls for cuts throughout government that we don't think are sustainable -- cuts in discretionary spending that would cause us to have to reduce the number of FBI agents by 2,700; cuts in Head Start that would mean 100,000 kids coming off the rolls. We don't think that's a practical level of funding. If you start restoring funding levels to what are practical, sustainable levels, we don't think that $133 billion is there. The issue to us is what do we do with the dollars we know to be there, the dollars in the surplus, that non-Social Security surplus, which the Republican budget puts into a tax cut? The President says those dollars should go into Medicare first. We think that's a very, very clear choice, and we think it's a mistake to go first to a tax cut.

MARGARET WARNER: All right. And Senator Domenici, why do the Republicans think that non- Social Security surplus should go to a tax cut, rather than into Medicare?

SEN. PETE DOMENICI: First of all, let's make it very, very clear: The administration spends in the first ten years $158 billion of the Social Security Trust Fund. Mr. Lew talks about 15 years. We have never done anything on 15 years. They use 15-year projections so they could come up with a figure of 62 percent would be enough to take care of Social Security while they spent the rest of it.

MARGARET WARNER: So your point is -- let me make sure I understand you. Your point is that even after the regular budget comes into a break-even point that the President is going to continue to spend Social Security money for operating expenses?

SEN. PETE DOMENICI: No doubt. And secondly -- secondly, he puts a large amount of the non- Social Security surplus into a trust fund for Medicare but says you shouldn't spend it. He says it's there to expand the life expectancy of the program, but it's not there to be spent on anything. Mr. Lew so testified before us. We believe that we took $132 billion, and we -- of the surplus. We did not use it for Social Security because it was not theirs. We did not use it for tax cuts because we want it for Medicare in the event, in a reform package, you need it. And I predict we won't even need that much for a major bipartisan reform to fix it for a long period of time, and take care of a lot of prescription drugs along with it.

MARGARET WARNER: But how can there be such a difference? I mean, how can $133 billion -- why do you think $133 billion is enough to solve the Medicare plan or problem, and the White House is talking about I think $350 billion over ten years?

SEN. PETE DOMENICI: The White House has no plan. They have no idea where $350 billion comes from. It's a figment of the imagination, and if you look at what the ten members of the 17-member commission voted in, they gave drug prescriptions to the poor, and they did not spend one penny of general funds -- none. They found the savings within the program to pay for some prescription drugs. And one last comment, and then I'll give the rest of the time to Mr. Lew: He talks about us cutting discretionary spending. Let me tell you what. Once again, we didn't spend any Social Security money on discretionary spending. Secondly, we increased defense more than the President. We increased education more than the President. We increased veterans more than the President. And if our Senate wants to take those priorities, then other programs have to be restrained and cut, because both the President and the Republicans have the same amount of money to spend to stay within the caps.

MARGARET WARNER: Okay, Mr. Lew, what's wrong with the Senate choosing, say, those priorities-- increased veterans, education and defense, and trimming or cutting other non-defense programs?

JACK LEW: The problem, Margaret, is that the numbers just don't add up. If you look at what would be required in terms of reductions outside of the areas that Senator Domenici just described, they're just not sustainable levels of reductions - 11 percent in this year growing to 20/25 percent in just a few years. Is it not possible to deliver the programs that people count on with those kinds of reductions. We've seen a plan like this before. In the early 1980's, you know, we saw when tax cuts came first. We saw what happened when defense increases were being put forward with the expectation that unrealistic discretionary savings could be accomplished. We ended up 20 years later with $3 trillion of debt. At the time, in the early 1980's, it was being called by then-Republican Leader of the Senate Howard Baker a riverboat gamble. But 20 years later and $3 trillion of debt later, it's not a gamble; we know it's a mistake. I think the differences we have between us can be worked out, but it's unfair to describe the President's Medicare plan as being somehow not real. It's very real. If the dollars can be spent on a tax cut, they can be spent on Medicare. If $350 billion is put into Medicare instead of a tax cut, it will extend the life of the Trust Fund, and the actuaries of the Medicare Trust Fund have said so. It's a policy choice that we make this year in Washington. We think that it's a rare opportunity to make this kind of a decision looking at a surplus, but we should make no mistake about it -- if we spend the surplus on the tax cut, we can't also spend it on Medicare. We can have some of both, but we have to put our priorities in the right order. And the President has been very clear that his priorities are Social Security first, followed by Medicare. And he has a tax cut proposal. He has proposed savings accounts, universal savings accounts, to help people save for retirement. We'd be happy to engage in a debate over whether that's the right tax policy or whether there are others that might be more desirable, but the size of the tax cut cannot come first. It cannot take the entire on- budget surplus or the vast majority of it, leaving for later problems like Medicare. When we looked at Senator Domenici's budget, it looked to us like when you include the debt service cost that it spent more than the on-budget surplus on the tax cut.

SEN. PETE DOMENICI: Oh, that's not true. That's not true. Come on. We saved Social Security and put every penny in. You don't; you spend part of it. Now, we have a surplus that doesn't belong to Social Security, and you conclude that you've got to pick $350 billion of it, put it in Medicare when you don't even know what they need, and essentially wait 15 years before the hard-working Americans can get a tax cut under your proposal. You're frightened to death of the idea that you can't find enough places to spend this surplus, so we can't have a tax cut. You want to spend it; we want to give it back to the people. That's clear.

MARGARET WARNER: All right, gentlemen, I'm sorry. We have to leave it there. We'll have you back again. Thanks so much.

JACK LEW: Thank you.