"No Time to Retreat"

By GEORGE J. CHURCH

The President insists on more arms and no big tax hikes in the budget

Full speed ahead for the Reagan revolution--and never mind the recession.

That, in essence, is the message of the President's budget for fiscal 1983, the first he has planned from scratch. Ronald Reagan is calling for slashes in social spending fully as painful as those enacted last year; in fact, total nondefense spending would actually decline slightly for the first time since 1960. Reagan is asking for an increase in military spending even more rapid than his earlier estimates. And he is prepared to accept deficits perilously close to $100 billion a year rather than change his tax-cutting strategy.

That is scarcely the message that Congress wants to hear. So deep are the fears of spreading recession and of the baleful consequences of ballooning deficits (see ECONOMY & BUSINESS) that if the President's program were presented this week for a single yes or no vote, few legislators would cry yes. Democrats are howling that further reductions in proposed social spending will strike savagely at the poor. Republicans are so horrified by giant deficits that some staunch conservatives are grumbling that planned defense spending ought to be reduced to stem the river of red ink. As Reagan himself noted in the budget message: "The voices of doubt, retreat and rejection are beginning to rise."

To those voices, the President turned a resolutely deaf ear. He headlined one section of his message NO TIME TO RETREAT. His 1981 accomplishments in slashing taxes and civilian spending while starting a huge military buildup, Reagan boasted, "far exceed anything the skeptics and critics ever dreamed possible just one year ago." The President added: "Our task is to persevere, to stay the course . . . to weather the temporary dislocations and pressures that must inevitably accompany the restoration of national economic, fiscal and military health."

In his budget message, Reagan claims that the growth rate of federal spending, which had soared to 17.4% in 1980, has declined to 10.4% this year and, under his plans for the fiscal year beginning on Oct. 1, will drop off to 4.5%. As a result, new federal spending will grow only $100 billion from 1981 to 1983, after increasing $163 billion from 1979 to 1981. Highlights of the President's proposals:

CIVILIAN SPENDING. Under the President's proposals, total spending by all departments and agencies of the Federal Government other than the Department of Defense would actually dip by $800 million in fiscal 1983, to $541.7 billion. Tiny though that figure is in terms of modern-day Government, it would represent the first outright decline in nondefense spending since the Eisenhower Administration, and it would come despite continued large increases in Social Security, medical benefits and interest paid on the national debt.

The drop results in part from cuts in social programs already enacted, but Reagan is proposing new reductions of $25.9 billion in fiscal 1983 below the spending levels previously scheduled. Some $11.7 billion would come out of "entitlement" programs that provide guaranteed benefits to people meeting certain qualifications: Medicare, Medicaid, food stamps, welfare, student loans, school lunches--just about everything except Social Security. The other $14.2 billion would be taken out of "discretionary" programs that are funded each year by Congress. These include such items as job training, subsidized housing and aid to mass transit.

DEFENSE SPENDING. If Reagan gets his way, military outlays will jump to $215.9 billion in fiscal 1983 (not counting $5.2 billion for defense-related activities), from $182.8 billion in the current fiscal year. That would be an increase of 10.5% even after adjustment for an expected inflation rate of 7.6% in defense items. "Total obligational authority," the Pentagon's right to sign contracts for future spending, would leap to $258 billion, a 13.2% inflation-adjusted rise. The plans constitute what is almost a do-everything-at-once policy. Reagan argues that "critical investments" are needed in a long list of missiles, bombers, cargo planes, ships, tanks and funds for training and readiness in order to make up for years of neglect and counter a Soviet military buildup.

DEFICITS. The figures are almost as shocking as expected. For fiscal 1982, which ends Sept. 30, Reagan now predicts a deficit of $98.6 billion, by far the biggest ever; the previous record was $66 billion under President Ford in 1976. Even if all his proposals are enacted, Reagan calculates, the deficit would shrink only to $91.5 billion in the coming fiscal year, and would be $82.9 billion in fiscal 1984, the year for which Reagan's 1981 budget message had forecast a small surplus. The inescapable conclusion: somehow in twelve months there had developed a $100 billion misunderstanding.

Actually, it will take a series of miracles to keep the deficits out of the twelve-digit range, which the budget document concedes "would impose extreme pressures on financial markets--[and] undermine the outlook for continued monetary restraint, reduced inflation and economic growth." To begin with, the estimate that the fiscal 1982 figure will stay a hair below $100 billion depends on the highly dubious assumption that Congress will enact further cuts in such programs as food stamps, welfare, Medicare and Medicaid to take effect in the remaining eight months of the year. The $91.5 billion projection for fiscal 1983 assumes not only that the legislators will accept all of Reagan's proposed reductions in social spending, but that the Administration can save $20.3 billion through "management initiatives," some of which seem exceedingly questionable. For example, the Reaganauts expect to raise $8.4 billion by accelerated leasing of offshore oil and gas lands, even though environmentalist objections have already forced Secretary of the Interior James Watt to pull back from his billion-acre leasing program.

Further, though he kept his pledge not to propose any significant tax increases, Reagan is asking for some minor ones, several of which Congress has shot down before. They include an increase in the federal tax on airline tickets to 8% from 5%, which would help pay the cost of the air-traffic control system, an assortment of "user fees" on yacht and barge owners and a proposal for a new 5% withholding tax on dividends and interest, which Secretary of the Treasury Donald Regan has declared the President to be "lukewarm" about.

Finally, even a fairly small error in the economic assumptions on which the budget estimates are based could bump up the deficit.

For example, the Administration is assuming that the interest rate on 91-day Treasury bills will drop to an average of 11.7% in calendar 1982, from 14.1% last year. But right now interest rates are rising once more.

A budget message, of course, is largely a political document, especially in an election year. Reagan argues strenuously that the present "unwelcome, painful, albeit temporary business slump" is an inevitable--though unforeseen--"result of the accumulated burdens of past policy errors," specifically "the discredited philosophy of spend and spend, borrow and borrow."

The President devotes four pages of his message to explaining why deficits will be so much higher than he forecast last year, without so much as mentioning the central argument of his critics: that the tax cuts he pushed through Congress last year were simply too large. Rather, he blames a variety of causes: 1) the recession, which will hold fiscal 1983 tax collections $31 billion below earlier estimates and push spending $8 billion higher, mainly for unemployment benefits; 2) unexpectedly high interest rates, which in his view result primarily from inflation and loose fiscal-monetary policy; 3) Congress, which did not enact all the spending cuts he proposed last year.

Finally, Reagan argues that the deficits are in part "the ironic by-product of our rapid and decisive success in bringing down the rate of inflation," since inflation drives up tax revenues along with prices and incomes. The budget message notes that the Consumer Price Index in the last quarter of 1981 was 9.4% higher than in the same period of 1980, the smallest increase in three years, and projects a further slowing to a 6.6% increase this year and 5.1% in calendar 1983. But the cost will be high: unemployment is expected to average 8.9% this year, and 7.9% in calendar 1983, vs. 7.6% in 1981. The jobless rate dropped unexpectedly to 8.5% in January, but that seemed to be a weather-related interruption of a distressing rise.

Politics aside, the long columns of figures in a budget reveal more about a President's priorities than any amount of Oval Office rhetoric, and the fiscal 1983 message makes the philosophical thrust of the Reagan Administration extraordinarily plain. The message declares without apology that military spending will swallow three-fourths of all the growth in federal revenues that can be expected in the next three fiscal years, and Social Security, which the Administration has not yet dared touch, will take much of the rest. Combined Medicare and Medicaid outlays will increase, too, though the Administration will try to slow the rise. But all other federal spending "will decline by 1% a year" from fiscal 1982 through 1987.

Indeed, Reagan pledges "a constant, comprehensive, ceaseless search for ways to reduce the size of Government" in areas other than defense. For 1983, he will be aiming at a broad range of programs. Some samples:

> A $4.5 billion reduction in the growth of Medicare and Medicaid spending, far deeper than the $1.9 billion slash imposed by this year's budget. Reimbursements to physicians and hospitals would be made less generous, and the poor receiving Medicaid would have to pay a "modest" share of the cost of their treatment. Last year, Medicare and Medicaid expenses grew a hefty $10.4 billion over 1980.

>A $2.4 billion slice in food-stamp spending, on top of a $1.7 billion cut this year. A person receiving food stamps now has his allotment reduced by 30-c- for every $1 his income rises; Reagan would make the reduction 350.

> A $2 billion whack out of job training and other employment programs on top of a $2.6 billion reduction this year.

> A $1 billion cut in federal aid to elementary and secondary education. Explanation from one White House aide: "Education got off lightly last year."

> An $800 million cut in the growth of federal pensions for military and civilian employees and in veterans' pensions and disability payments. All were almost untouched last year. Pensions now rise with the Consumer Price Index; Reagan proposes to key them to the rise in average wages for federal employees still on the job, if that is lower.

>A $600 million cut in aid for mass transit. Having persuaded Congress last year to end subsidies for construction of new mass-transit systems, Reagan now wants to phase out operating subsidies as well.

In addition, Reagan proposes a new and stricter "means test" for student loans, saving $800 million; tighter work and eligibility requirements for welfare recipients; and continued or new reductions in a host of other programs. As before, he defends most of these cuts as reducing benefits for people who do not need the services and insists he is maintaining aid to the "truly needy." For example, he proposes to save $600 million in federal assistance to help the poor buy fuel by retargeting the program to concentrate on the coldest states.

"There will be a lot of controversy over some of these proposals," says Budget Boss David Stockman. "The legislative process is very volatile and complex." That is putting it mildly. Many Representatives and Senators agree that the rapid growth of entitlement programs must be slowed. But even some staunch conservatives warn that reducing discretionary social spending will be more difficult. Says Republican Senator Paul Laxalt of Nevada, a close friend of Reagan: "We are awfully close to the bone."

Nor will the defense plans move through Congress as easily as they did last year. Far from it. The Democrats, who control the House, are sure to present an alternative budget, calling for less reduction in social spending and a slower rise in defense outlays. They are likely to win some support from the Gypsy Moths, 20-odd moderate House Republicans from the Northeast and Midwest who gave Reagan vital votes last year but have little stomach for additional reductions in programs that would hurt their constituents while defense spending rises. The Gypsy Moths called at the White House last week and pleaded for cuts in defense programs in return for support for reducing social programs, but Presidential Counsellor Edwin Meese turned them down. Says the Gypsy Moths cochairman, Carl Pursell of Michigan: "My group is pretty rebellious right now."

Criticism of all-out defense spending in an era of intimidating deficits is being heard even on the far right, which earlier had regarded military budgets as being sacrosanct. Says Howard Philips, national director of the Conservative Caucus: "We are going to have a rocking socking economic disaster if the President does not get control of this deficit. He should say that unless the economy is solid, our defense posture will be in danger, no matter how much money we spend. Therefore he should say he will hold this year's [total spending] budget to last year's levels and spread the pain around to both defense and social programs."

The red ink has become the overriding problem for Reagan. Congressional Republicans, many of whom have spent their entire political careers denouncing "Democratic deficits," do not feel that they can support major military programs that will make the budget gap wider, even if the proposals come from a Republican President. The Democrats, who blame the deficits on tax cuts that in their view primarily benefited the rich, certainly will not vote for a resolution embodying Reagan's budget, or anything resembling it, if the Republicans do not.

On Capitol Hill and in the White House there is a worry that Congress may become so deadlocked it will be unable to agree on any kind of measure specifying overall spending, revenue and deficit targets. Says one White House aide: "We may not even get a budget resolution passed this year." If not, Congress would have to fund the Government by a series of stopgap "continuing resolutions." That would leave a pall of uncertainty hanging over the level of spending, and deficits, throughout the fiscal year.

Much depends on the course of the economy. Congress is expected to stall on the budget for the next three months or so, watching to see what happens to production and employment. If, as Republic can true believers hope, a powerful recovery begins by spring, promising to create many new jobs and raise incomes sharply enough to hike Government revenues and shrink those menacing deficits, much of the present opposition to Reagan's fiscal policy would disappear.

On the other hand, if the recession is still in progress by May or June, or if the recovery seems weak and shaky, some leaders in the Republican-controlled Senate might well send a high-powered delegation to Reagan to plead for a revamping of the budget. Presumably, they would urge less defense spending and possibly even some tax increases to shrink the deficit. Says Laxalt: "We would owe it to the President to give him our best judgment and advise accordingly."

Political jockeying will immensely complicate the calculations. Some White House aides think the budget, deficits and all, will work for the Republicans' benefit.

The strategy is to get the budget passed in the G.O.P.-controlled Senate, then expect the Democratic-controlled House to turn down Reagan's social-spending cuts. Says a White House aide: "Politically, you can then blame the Democrats in the House for making the deficit even higher than we are projecting." Reagan's advisers also believe that the Democrats will have trouble fashioning a campaign issue out of the deficits and not simultaneously advocating higher taxes, not a stand any politician wants to take in an election year. On the other hand, the White House is aware of the danger that a prolonged congressional deadlock, and the fear of deficits still greater than Reagan predicts, could raise interest rates and extend the recession close to the November elections, which could mean misery for Republicans, not to mention the nation.

Any decisions on whether to shift budget strategy, of course, would be taken by Ronald Reagan, who has made the budget less the symbol than the sword of his struggle to reverse the direction of Government. The President astonished even his own supporters by his sweeping victories last year -- but that was be fore the recession and the estimates of towering deficits. This year's battle of the bulge will be an entirely new campaign. -- By George J. Church.

With reporting by David Beckwith, Douglas Brew

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