President Bush and congressional Democrats this week opened a battle over the federal budget with enormous political consequences for both sides. The debate is likely to figure prominently in next year's congressional midterm elections. The problem is this: A slowing economy and President Bush's massive tax cut have drained much of what remained from the federal budget surplus. That will make it much tougher for the president to increase spending for his two main priorities rebuilding the military and reforming education.

Democrats are openly challenging the president to propose a new budget in light of the new economic realities. They are also warning him not to dip into the largest remaining surplus in the federal budget, the Social Security pension fund that will be needed to cover the increasing numbers of Americans who will retire over the next several years.

"I think the American people expect and want, especially with the baby boomers coming [into retirement] in the next few years to claim their Social Security [pension] and Medicare [health care] funds," said Congressman Richard Gephardt, House Democratic Leader. "They expect us to keep these funds inviolate [off limits], they expect us to use them to pay down the back debt of the country so that we are in the fiscal shape that we need to be in to take care of our obligations, our promises to people with regard to their Social Security and Medicare funds."

The president says he believes he can still fund his budget priorities without dipping into the Social Security surplus, a pledge he made during last year's presidential campaign. He also defends his massive tax cut as good for the economy and warns Democrats against spending more money on social programs:

Half the [tax] rebate checks have gone out. There are still more checks to go out and I believe it is going to provide good stimulus for our economy," said Mr. Bush. "Now, we got ample money to meet our nation's needs. What we need is fiscal discipline in Washington, D.C. We need to make sure we have prioritized spending and not overspend."

The battle over the budget is nothing new in Washington. President Clinton's budget showdown with congressional Republicans in 1995 was a major factor in his re-election the following year. And many analysts see this year's budget battle as the first major political test for President Bush.

"There is a perception that money is tight, there is going to have to be some very hard bargaining over Republican versus Democratic priorities," said Allan Lichtman, presidential historian at the American University. "George W. Bush, much more than early in his administration, is going to have to prove what he claimed during the campaign, that he is the kind of leader who can bring both sides together, hammer out compromises and get things done. This fall will be George W. Bush's first big test of his presidency."

The budget fight has enormous economic consequences as well. With both sides wary of tapping the Social Security surplus, there is a growing likelihood of across the board budget cuts that will impact government spending on defense, schools, farmers and the elderly.

Mr. Bush's political position on the budget is further complicated by Democratic control of the Senate. Stuart Rothenberg publishes an independent political newsletter here in Washington, He says that "clearly, they [Democrats] are not going to go along with his proposals and so he [Bush] faces a softening economy, a [Democrat controlled] Senate that is out to get him and I think an overall political environment where he has got a very difficult task."

The budget battle also gives both political parties an opportunity to try out themes and strategies in advance of next year's congressional midterm elections. Democrats hold a mere one seat advantage in the Senate while Republicans control the House by only a handful of votes.

"Already you are seeing the typical blame game in Washington. As the battle of the budget gets a little bit hotter, you will see the Republicans blaming the big-spending Democrats for budget problems and calling for discipline in spending," says Mr. Lichtman. "And you'll see the Democrats blaming George W. Bush and his administration for a big give-away to the rich in his tax cut plans. And so already, the jockeying has begun for control over both houses of Congress [in the 2002 midterm elections]."

The budget battle also has important implications for President Bush's own re-election prospects in 2004. Americans are already worried about a national economy hovering near recession and the president knows that voters will hold him responsible three years from now unless there is an economic turnaround.