Reagan’s Budget Based on Healthy Economic Growth

President Reagan, leaving to his successor many of the harsh choices required to put the federal government’s budgetary house in order, Thursday unveiled a $1.1-trillion spending blueprint that calls for a wide variety of politically sensitive defense cuts but increases outlays for education, scientific research and the battle against AIDS.

If the economy remains in healthy shape, Reagan predicted that his budget would reduce the federal deficit to $129.5 billion in the fiscal year that begins next Oct. 1, down modestly from an estimated $146.7 billion for the current fiscal year.

Abandoning his confrontational approach with Congress, Reagan’s budget for fiscal 1989 conforms to a broad agreement on government priorities that was forged by the White House and lawmakers last November in the wake of the stock market crash.

‘Give and Take’

The President acknowledged that his budget, which includes some minor tax increases that Congress has already enacted, “does not fully reflect my priorities” but represents “give and take on all sides.

“In presenting this budget, I am keeping my end of the bargain,” Reagan said in submitting what, for all practical purposes, is his last budget. “I call upon Congress to uphold its end.”

But Congress and the White House, by avoiding dealing with fundamental imbalances in the federal budget, are hoping to postpone the task of repairing any damage caused by a national debt that will soar from about $1 trillion in 1980 to almost $2.6 trillion by the time Reagan leaves office next January.

Under the tax and spending policies proposed by Reagan, the budget still would be $23 billion in deficit in 1993. And even reduction to that level would require that the nation’s current economic expansion last an unprecedented 11 years.

The Administration proudly points to the annual 2.6% economic growth rate since 1980 and a five-year economic expansion that already is the longest of any in peacetime. Yet it is relying on another six years of economic growth averaging more than 3% a year just to reach a $23-billion deficit in 1993.

“The underlying problem is that neither the President’s budget nor (the White House-Congress) summit agreement directly confronts the deficit issue,” said Rep. Leon E. Panetta (D-Monterey), who is expected to become chairman of the House Budget Committee next year. “Instead, they tiptoe around it.

Sees ‘No Choice’

“But the next President and the next Congress will have no choice but to act,” Panetta said. “Without action, continuing deficits will deplete the resources we need to take on national priorities.”

Because of the previous agreement, Reagan’s budget sparked few political fireworks on Capitol Hill--a sharp contrast to previous White House spending plans, which lawmakers were fond of declaring “dead on arrival.”

“It appears the President’s budget meets the guidelines laid down in the summit last November. . . “ said House Budget Committee Chairman William H. Gray III (D-Pa.). “There are some better domestic priorities than in the past. However, there still are some problem areas, such as the willingness to build more houses in space as opposed to housing here on Earth.”

Senate Budget Committee Chairman Lawton Chiles (D-Fla.), after leaving a White House meeting with Reagan, told reporters: “I think it’s a good-faith budget. It looks like it meets the (budget) summit agreements. It’s right at the targets.”

The two-year, $76-billion budget reduction pact that Reagan struck with Congress last November set a limit of $299.5 billion to fund the military in 1989--only $7.5 billion above this year’s level--and imposed modest cuts in domestic programs. It limited tax increases for next year to the $14 billion that Congress approved just before adjourning last December.

The aim of the pact was to demonstrate to investors shaken by the sudden stock market collapse that the White House and Congress could work together to avoid the indiscriminate spending cuts that otherwise would have been required by the Gramm-Rudman budget-balancing law.

Growth Rate Optimism

To avoid a repeat of last year’s endless wrangling over the budget, the White House and Congress are counting on the economy to maintain the 2.4% growth rate that the Administration projected for this year. Yet some analysts, worried about recent weakness in consumer spending and in housing, believe that the nation will be lucky to achieve such growth.

Under Gramm-Rudman’s convoluted accounting rules, which do not count certain one-time budget savings, the White House expects to barely meet the law’s allowable deficit ceiling of $146 billion--$10 billion above the official target of $136 billion. The White House projects that its budget will come in just $3.3 billion under the limit. The one-time savings include sales of government assets such as real estate and loans.

If the economy fails to perform up to expectations, the deficit could be driven up by a combination of declining tax revenues and increased spending for social programs. Congress might then face the politically explosive challenge of extracting further savings from the budget just a few weeks before November’s presidential and congressional elections.

Defense Cutbacks

Reagan’s conciliatory budget imposes its harshest cutbacks on his own military buildup, slashing $33 billion from the Pentagon’s previous spending plans for fiscal 1989 and $177 billion over the next five years compared to its plans of just one year ago.

Under newly installed Defense Secretary Frank C. Carlucci, the Pentagon plans to pare back several weapons programs and proposes closing a handful of politically entrenched military bases.

“For the first time, the Pentagon is preparing to make some of the tough policy choices that Congress has been demanding for years,” said Rudolph Penner, former director of the Congressional Budget Office and now a senior fellow at the Urban Institute. “But when Congress sees what those tough choices are, they may not be all that enthusiastic about them.”

In compliance with last November’s budget agreement, Reagan proposed no changes in Social Security but he continued the fight with certain lawmakers over how to save $1.2 billion from the Medicare health program for the elderly.

Popular Increases

At the same time, though, Reagan larded his 1989 budget request with a number of spending increases that are sure to be popular with lawmakers this election year.

These include a proposed $1.5-billion increase in education outlays, which represents a significant rise of 8% and a complete reversal from last year’s White House call for sharp cuts in education spending.

The new budget also earmarks nearly $2 billion to combat “the scourge of AIDS,” nearly 40% over the 1988 spending levels, and an additional $1.6 billion in budget authorization to improve the nation’s air traffic control system.

Scientific research and space programs also are in line for significant spending increases, with Reagan requesting a $2.4-billion boost for NASA’s efforts to improve the space shuttle’s safety, to expand development work on a manned space station planned for the mid-1990s and a new space research facility.

Drug Enforcement

To combat crime, the White House is seeking a 13% increase in drug enforcement and treatment efforts to $3.9 billion, along with a request for $437 million, more than double last year’s budget, to relieve overcrowding in federal prisons.

Despite the unusual restraint with which they greeted the new budget, lawmakers are sure to challenge some of the Administration’s spending priorities. The White House budget, to make room for its new spending plans, once again recycles a number of perennial Administration proposals for reducing government programs.

These include eliminating urban development action grants, public subsidies for Amtrak rail passenger service, grants to operate mass transit systems, Small Business Administration direct loans and the entire Interstate Commerce Commission, which retains only a minor role in regulating truck and railroad transportation.

Moreover, the White House again proposed to sell a handful of naval petroleum reserves and some regional power authorities. But it abandoned its efforts to sell the huge Bonneville Power Administration in the Northwest and to eliminate legal services programs for the poor.

‘Possible Privatization’

Although these “privatization” efforts have never gained much support in Congress, that did not curb White House Budget Director James C. Miller III’s fervor for the cause. He recommended for the first time that local governments should sell off some federally financed sewage treatment plants and mass transit projects, while proposing to look into the “possible privatization” of some Postal Service operations and the federal government’s uranium enrichment facilities for building nuclear weapons.

The White House proposed only relatively minor changes in taxes, including a tentative suggestion for a new tax break to help low- and moderate-income families finance college education and a recommendation that mutual fund shareholders be exempted permanently from a provision in the 1986 tax reform law requiring them to pay an additional $400 million in taxes to cover their funds’ expenses.

The budget also includes the White House recommendation to maintain a research and development tax credit that is scheduled to lapse at the end of this year.

The only significant tax increase would raise $1.6 billion by requiring all state and local government employees to pay the same tax as private workers for Medicare coverage. Only new government employees are currently required to pay the tax.

Staff writer Oswald Johnston contributed to this story.