Staying the Collision Course

By KURT ANDERSEN

The White House and Congress are drawing budget battle lines

Most politicians quickly came to the same conclusion about the collective "message" delivered on Election Day. The voters wanted a pragmatic, bipartisan approach to high unemployment, cuts in defense spending and a smaller federal deficit. Last week it became clear that President Reagan had heard a different message. Sketching out his proposed fiscal 1984 budget, Reagan has tentatively decided to call for more severe cuts in social spending, while leaving the Pentagon's budget essentially intact. Instead of forgoing his supply-side tax cuts to reduce the deficit, he is flirting with the idea of making them effective six months earlier. Republican leaders in the House and Senate ranged from unenthusiastic to angry about the President's intransigence. If Reagan holds firm, he may be headed for the bloodiest fight of his presidency.

Judging by his speech in New Orleans to a convention of the U.S. League of Savings Associations, Reagan is not about to back down. Facing a shortfall of at least $150 billion in the current fiscal year, which has now been under way for two months, the President declared, "A propaganda campaign would have you believe that these deficits are caused by our so-called massive tax cut and defense buildup. Well, that's a real dipsy doodle." According to the President, "Deficits result from sharp increases in nondefense spending." In fact, neither the "propaganda campaign" nor Reagan's counterpropaganda is correct or incorrect, since attributing the deficit to any particular cause is necessarily a matter of political preference. This fiscal year, however, nondefense spending will rise an estimated $14.6 billion, or only 3%. Military costs will go up $33.6 billion, or 18%, while the Administration's tax cut will shave 1983 revenues by $35 billion.

Wherever the blame is put, Reagan has made only a token effort to reduce the deficit in his next budget. In the two weeks following the elections, he and his advisers held nine meetings to map out fiscal 1984 budget proposals, which will be presented to Congress in refined form two months from now. The rough cut: $26 billion to be taken exclusively from non-defense spending, including $8 billion from Social Security benefits, leaving a deficit estimated at a minimum of $180 billion. Budget Director David Stockman said it could even rise as high as $195 billion unless changes are made. Several White House advisers last year argued unsuccessfully for additional excise tax boosts and more gradual defense increases. This year, although even more worried about the deficit, they kept their counsel. Said one top aide of his boss: "We found he is adamant on the question of defense and taxes. So why beat a dead horse?" Indeed, at a Friday afternoon Cabinet meeting, Reagan made it plain that he is willing to tolerate huge deficits.

On monetary policy, Reagan may press the Federal Reserve Board for an expansion of the money supply to lower interest rates, even if it risks setting off a new inflationary spiral. On fiscal policy the President is inclined to make only slight concessions. Since the Administration's 1984 defense-spending plans are based on a projected inflation rate of almost 1% higher than the current 5%, Reagan may agree to cut the Pentagon budget by a corresponding amount. This "deflation dividend" might result in savings of about $2 billion. Reagan's other possible concession: doubling the federal gasoline tax to 8-c- per gal. However, the resulting $5 billion in annual revenue would be earmarked exclusively for bridge, highway and mass-transit repairs, and would have only a small, indirect impact on the deficit. Further, the measure's effect might be a net loss of jobs, according to Martin Feldstein, the new chairman of Reagan's Council of Economic Advisers.

The Pentagon savings and the gas tax revenue would be more than offset by another, more characteristic fiscal move that Reagan was contemplating last week. Treasury Secretary Donald Regan has suggested that next year's 10% income tax cut (the last of three annual reductions totaling 25%) take effect on Jan. 1 instead of July 1, even though the accelerated timetable would deprive the Treasury of some $14 billion. "We hope it would further stimulate the economy," the President said. "That's what's so appealing about it."

It was closer to appalling, however, to those who have lost faith in supply-side solutions. Stockman argued privately against the plan. Less politic was Feldstein, who said that a 10% tax cut in January "could have serious adverse effects on the economy." Any such quick-fix proposal would almost certainly be defeated in Congress. G.O.P. House Leader Robert Michel, nearly beaten in his Illinois district on Nov. 2, went to the White House last week with Senate Majority Leader Howard Baker to deliver that message. "We don't have the votes," Michel said he told Reagan. After the 50-min. Oval Office meeting, Baker said, "We've wrung a lot out of the nondefense side. Now we are going to have to take a look at the defense side."

Two days earlier, Michel had heard almost nothing but disgruntlement with Reagan at a gathering of seven Republican House leaders. Said New York's Barber Conable of the meeting: "We discovered the Administration has gone out of its way to offend every interest group that has come down the pike." It was significant that Mississippi's Trent Lott, deeply conservative, berated the Administration for its insensitivity to women's issues and argued for cuts in the arms budget.

New Mexico Republican Pete Domenici, chairman of the Senate Budget Committee, addressed the financial executives in New Orleans last week just a few hours before Reagan spoke. Domenici recommended substantial new taxes as well as trims in the military budget. "I do not believe that a collision between Congress and the Administration is inevitable," he said hopefully and added: "I know that such a collision would be destructive." Perhaps the breadth and depth of displeasure within his own party, especially as Congress reconvenes next week, will make Reagan rethink his unbudging budgetary plans. If he does not, the result could be an enervating stalemate with Congress and further deterioration of the economy.

--By Kurt Andersen.

Reported by David Beckwith with Reagan and Douglas Brew/Washington

With reporting by David Beckwith, Douglas Brew/Washington

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