A Gauntlet Thrown at Government : Taxes Down, Defenses Up

Sometime this spring we will find out if Ronald Reagan is a wimp or not.

The budget the President sent to Congress last week draws the line where he has been trying unsuccessfully to draw it for the last six years. Thomas P. O’Neill Jr. (D-Mass.), the Speaker of the House, has declared open war on the budget; and the congressional leaders of Reagan’s own party--Bob Dole of Kansas, the Senate majority leader, and Robert H. Michel of Illinois, the House minority leader--agreed that the President’s budget was “dead” before it was even released.

Throughout his presidency, Reagan has stated forcefully and continually that his primary objectives were to reduce overall federal domestic activities, build up defense and cut taxes. He has certainly cut taxes, and the government is now spending much more on defense than when he took office--leaving aside debate on the wisdom of the expenditure.

He has not succeeded in reducing federal domestic spending in any significant way, however. Federal spending on programs for the home folks--including handouts to poor people and not-so-poor people, like farmers, bankers, small businessmen, Northwest power consumers, college students, water engineers, medical researchers, train passengers, bus riders and everybody over 65 and his doctor--has stubbornly resisted serious reduction. Domestic federal spending in this fiscal year is 17.6% of gross national product, compared with 17.1% in 1980.

All pressures to cut domestic spending have been absorbed by the ballooning federal deficit, like an air bubble on a weak-walled bicycle tire tube. For reasons having more to do with international payment flows than any conscious policy management, the United States has, for the past five years, been able to ratchet government borrowing up to enormous levels without paying any obvious price in higher inflation or interest rates. As long as borrowing is less painful than spending cuts, red ink will flow.

Ever since the Puritans, legislatures have been outlawing things, like deficits or gambling, that feel good and do little obvious harm. Last year, Congress, under pressure from an unusual alliance of liberal economists and fiscal conservatives, lived up to that tradition and outlawed deficit spending. The Gramm-Rudman deficit reduction law mandates sharp reductions in the federal deficit in the next fiscal year and a balanced budget by 1991--although on Friday a federal Appeals Court ruled its triggering mechanism unconstitutional.

The liberals and conservatives who supported Gramm-Rudman did so for different reasons. The liberals’ sudden born-again aversion to deficit spending springs less from economic conviction than from the desire to force defense spending cuts and, most important, to build pressure for a tax increase. Restoring some of the tax base whittled away by five years of Reagan tax reform is the best and safest way to protect domestic programs from further budget-cutting.

Conservatives, including the President, want to use Gramm-Rudman to force the sweeping domestic program cuts they have not been able to achieve. This sets the stage for what could be a truly historic confrontation, determining the course of federal policy for a long time to come--especially if, on appeal, the Supreme Court validates the constitutionality of Gramm-Rudman.

As an opening challenge, the President’s budget could hardly be more strident in its bellicosity. Not only does he insist that there will be no tax increase of any kind--but he insists that domestic programs will bear all the burden of the Gramm-Rudman cuts.

Rubbing it in, Reagan is proposing a full 12% increase in defense spending, arguing somewhat disingenuously that he has no choice. As part of last year’s budget compromise, he agreed to hold defense spending flat for a year and put in for a 3% increase in the new budget over inflation. Partly because Gramm-Rudman mandated some small defense cuts in the current year, the Administration argues that defense spending is 5% below last year’s in real terms. Making up the 5% shortfall, meeting the 3% growth target and compensating for an anticipated 4% inflation rate requires a 12% total spending jump.

The proposed domestic cuts read like a litany of the four-star items on the conservative hit list. The elimination of a whole host of federal agencies and special subsidies tops the agenda--the Small Business Administration, the Economic Development Administration, the Interstate Commerce Commission, the Appalachian Regional Commission, the Legal Services Corp., the whole series of agricultural and soil conservation programs and urban development action grants.

Agricultural price supports, until this year the fastest-growing area of domestic expenditure, will receive one of the sharpest proportional cuts. Price-support spending is predicted to fall from $26 billion in this fiscal year to $18 billion next, a 31% slash before inflation.

There will be generally modest, but across-the-board cuts in aid to education, job training and social services programs, and deep cuts in college student assistance. Aid to middle-class students will be almost eliminated, and efforts stepped up to collect from previous loan defaulters.

In health care, the Administration wants to raise Medicare premiums and squeeze a bit harder on hospital payments. Medicaid payments to the states will be capped, and food stamp and welfare administrative rules tightened.

The items on the Reagan cut list range from red-flag waving at liberals to the relatively unexceptionable. Nobody can seriously argue that the entrepreneurs of America need 4,000-plus civil servants in the Small Business Administration; nor will the Republic shudder if the Interstate Commerce Commission goes to its reward in the great Bureaucratic Beyond.

All of the proposed cuts taken together, however, constitute a challenge to virtually every domestic program interest. The deliberate emphasis on the defense buildup underscores how forcefully Reagan is tossing the gauntlet at Congress.

The conventional wisdom is that the President doesn’t really mean it. Smart money in both Houses of Congress is betting that the President will bend a bit in his defense buildup, and then accept a tax increase--perhaps a tax on oil--to soften the impact of the domestic cuts.

The testing is to come in spring. If Congress cannot agree on a budget resolution and the deadlock persists into summer, the still-unresolved Gramm-Rudman legislation will mandate deep cuts in both the President’s cherished defense establishment and the domestic programs liberals seek to protect.

In a showdown, however, Reagan will have all the advantages. Defense spending can always be restored in subsequent years; domestic programs, once killed, will stay dead forever. Reagan’s opponents have made a habit of underestimating him. The 1987 budget is probably his last chance to make the major slashes in the federal Establishment that he has targeted for 20 years. The likelihood is that he will do exactly what he says.