Negotiators Agree on $30-Billion Deficit Cut : Mandatory Cutbacks Are Now in Effect

After four weeks of intense negotiations, President Reagan and congressional leaders agreed Friday on a plan to pare the federal deficit by $30 billion this year.

The agreement, too late to head off $23 billion in automatic spending reductions under the Gramm-Rudman law, is short on specifics and instead sets out general goals for tax increases and domestic and defense spending cuts. House and Senate committees will have to translate those goals into legislation that Congress can be induced to pass and Reagan to sign.

And, with all sides expressing only lukewarm support for the package, that job could be difficult.

‘Solid Beginning’

“This agreement is probably not the best deal that could be made, but it’s a good, solid beginning,” Reagan said.

Shortly after the agreement, Reagan signed an order implementing the $23 billion in spending cuts required by the Gramm-Rudman law, half of them from domestic programs and half from defense spending.

Those nearly across-the-board cuts will be reversed if Congress can follow through on Friday’s agreement by enacting at least as large a combination of tax increases and spending cuts for the 1988 fiscal year, which began Oct. 1.

The package is also designed to cut the deficit by almost $46 billion in fiscal 1989, but many legislators expressed doubts that it would achieve that goal.

Relying on Guarantees

It is impossible for any agreement this year to bind next year’s Congress--particularly in the hotly charged atmosphere of an election year. However, Treasury Secretary James A. Baker III said the Administration would rely on “the full faith and personal guarantee of the (congressional) leadership.”

Friday’s agreement became possible only when all sides yielded on some long-held positions.

For Reagan, the agreement means supporting $9 billion in unspecified new taxes and accepting $5 billion in defense spending cuts.

Democrats had to abandon their hopes for a larger tax increase and accept $6.6 billion in domestic spending reductions, almost two-thirds of which will come from Medicare and other benefit programs.

Some negotiators were scornful of the failure to agree on specific tax increases and spending cuts.

“It’s kind of like Vietnam,” Rep. Jamie L. Whitten (D-Miss.) said. “Announce a victory and work it out later.” Whitten is chairman of the House Appropriations Committee, which must find $2.6 billion in cuts from the domestic programs in its jurisdiction.

Reagan’s biggest challenge may be selling the plan to his own party in Congress, where Republicans have roundly denounced it as having too few spending cuts and too many taxes. Many contend also that it will never live up to its promises.

‘Biggest Mistake’

Reagan “is now making, domestically, the biggest mistake of his second term,” Rep. Newt Gingrich (R-Ga.) complained.

The plan’s backers hope that when opponents consider the alternative--the automatic cuts that took effect Friday under the Gramm-Rudman law--they will decide that Friday’s agreement is the lesser evil.

Although it was the Oct. 19 stock market crash that led to the budget negotiations, the agreement brought only mixed signals from the market. The Dow Jones industrial average rose 15 points in the hour after the agreement was announced, but more stocks declined than rose.

“The capital markets are not that dumb,” said Sen. William L. Armstrong (R-Colo.), an outspoken opponent of the package.

Plan ‘Disappointing’

Allen Sinai, chief economist with the New York brokerage firm of Shearson Lehman Bros., described the plan as “extremely disappointing” and predicted that it will not make “any significant dent in the deficit.”

Even if Congress follows through on the promise to slash $30.2 billion from the projected fiscal 1988 deficit of $180 billion, the plan still would leave that year’s deficit at about $150 billion. That is more red ink than the $148 billion recorded in fiscal 1987.

“The bigger picture is that we are losing,” Sinai said. “That’s very sobering.”

Reagan answered the criticism by suggesting that Wall Street itself was partly to blame for the recent volatility in financial markets and should “straighten out themselves, also.” The President quoted a point made in a letter he received from a voter: “Even a farm hand cleaning out the stalls in a barn knows that what he is cleaning out didn’t come from outside.”

But the negotiators, who had to shepherd the agreement through vicious political crosscurrents, said that the package was simply the best they could do. “I just don’t think now was the time to do any more,” said Sen. Pete V. Domenici (R-N. M.), one of the negotiators. “I regret that.”

One-Shot Windfalls

Although Reagan said that the agreement’s value is in “laying the foundation for long-term solutions” to the deficit problem, a substantial part of the reduction would come from one-shot windfalls and revenue generators that have yet to be tested.

For example, $5 billion would come from allowing rural electric cooperatives to prepay their loans without penalty. But future deficits would be worsened by the absence of those payments.

The negotiators contend also that they will bring in an additional $1.6 billion by enlarging the Internal Revenue Service and cracking down on tax cheats--a plan that many outside analysts say is not likely to meet its goal.

One of the most difficult areas for the negotiators was parceling out the reductions in entitlement programs, the federal benefits for which people are automatically eligible if they meet age, income or other criteria. They backed away from any plan to limit cost-of-living increases for Social Security recipients or any other federal retirees.

Medicare to Bear Cuts

If the agreement is implemented by legislation, Medicare will bear the largest share of entitlement cuts, about $2 billion this year. However, negotiators said that those reductions will not increase out-of-pocket costs that recipients pay under the programs. Instead, they said, the savings will be achieved by cutting back on the amount doctors and hospitals are reimbursed.

Beyond Medicare, the agreement specifically mentions only farm price support programs, which would be cut by $900 million; college student loan programs, although the banks and not students would feel the impact; and federal employee benefit programs, where changes would result in savings of $850 million.

The Gramm-Rudman cuts that took effect Friday treat some programs more harshly than the agreement among the budget negotiators.

Defense spending absorbed an $11.5-billion cut, compared with the $5 billion in Friday’s budget-cutting package.

And reimbursement to doctors and hospitals under the Medicare program was scaled back by 2.3%.

Staff writer Oswald Johnston contributed to this story.