Reagan’s Final Budget: More Defense Outlays

President Reagan, setting the stage for President-elect Bush to present his own ideas to the Democratic-controlled Congress next month, presented a farewell budget Monday that would sharply cut several entrenched domestic programs while letting the defense budget grow again.

Bush is expected to hew fairly closely to the outgoing Administration’s overall guidelines, which would hold the line against higher taxes and keep Social Security benefits intact. Reagan’s $1.15-trillion spending blueprint for fiscal 1990 would leave a deficit of $92.5 billion, down from the $161.5 billion expected this year.

But Reagan’s budget, by seeking to restart the Pentagon buildup while continuing to propose domestic cutbacks, will make it a little easier for his successor to appear “kinder and gentler.”

Aid for Social Programs

Bush is expected to agree with congressional Democrats to scale back military spending increases and to offer a few fresh morsels of government help for child care, education and other social programs.

In a statement, Bush called Reagan’s final spending proposal “an excellent budget which demonstrates clearly” that the deficit can be reduced without raising taxes. “Naturally, I support its intent. However, I will continue to review it for possible amendments after I assume the office of the presidency.”

Apart from holding down defense spending to finance some of his social initiatives, however, Bush is likely to discover that Reagan has not left him much wiggle room as long as he sticks to his repeated pledge to avoid a tax increase.

Moreover, even though Reagan’s proposed spending cuts--including the elimination of dozens of programs that he has vainly attempted to kill before--cover mostly familiar territory, they are not as Draconian as those included in some of his past budgets.

“This is not Rambo Reagan,” Joseph Wright Jr., the White House budget chief, said in an interview. “We did not have to slash and burn through the federal government to reach our deficit targets.”

For fiscal 1990, which begins on Oct. 1, the target set by the Gramm-Rudman law is a $100-billion deficit.

To get there, Reagan would cut $33.9 billion from the spending that would occur if programs continued at their current levels. He proposed paring back payments to hospitals and doctors, subsidies to farmers and benefits for government workers. Another $6 billion would be saved by selling a handful of federal facilities and disposing of part of the government’s vast loan portfolio.

2% Above Inflation

At the same time, the new budget proposes to add 2% in funds to the Pentagon’s coffers above the inflation rate, which is forecast to be about 3.5% in 1990. It would provide a real boost to a handful of other government activities, such as AIDS research, the space program and the war on drugs.

Reagan also allocated additional funds to help bail out failing savings institutions and to begin the rebuilding and cleanup of aging nuclear weapons factories.

Congressional Democrats immediately found much to attack in Reagan’s budgetary swan song.

“It provides a formula for a meaner, harsher America rather than a kinder, gentler one,” said Senate Budget Committee Chairman Jim Sasser (D-Tenn.). “It would be a serious mistake for George Bush to dress up Ronald Reagan’s budget in slightly different clothes and expect it to be the basis for constructive budget debate. (Bush should) give us a budget that is a practical solution rather than a political statement.”

‘Largely Irrelevant’

And as soon as Reagan’s budget was officially released, Senate Majority Leader George J. Mitchell (D-Me.) dismissed it as “largely irrelevant.” Earlier, Mitchell told a television interviewer: “I think we’re waiting to hear the Bush budget. That’s the one that will be important.”

Robert Reischauer, a Brookings Institution analyst here, commented: “Reagan has played this song before and not gotten anyone in Congress up to dance.”

But Treasury Secretary Nicholas F. Brady, who will continue in that post under Bush, defended the Reagan budget proposal.

“I think it’s irrelevant that they call it irrelevant,” Brady said. “Either they will not make the deficit reduction targets or they will have to take some of these reductions.”

Brady, while saying that “it is too early” to discuss where Bush will change Reagan’s spending plan, told reporters that it “is certainly probable that much of the current budget will remain on the table.”

Bush told lawmakers last week that he expects to outline his own budget priorities in a speech to a joint session of Congress on Feb. 8 or 9, about three weeks after taking office Jan. 20. He then is likely to turn to his new budget director, Richard G. Darman, to lead his team of negotiators in talks with congressional leaders.

Darman has told lawmakers that he thinks Bush should not be afraid to accept the meat-ax spending cuts that would take effect automatically if Congress fails to approve spending and tax laws that come within $10 billion of meeting Gramm-Rudman’s $100-billion deficit target. The automatic cuts from most government programs, Darman has said, would be better than a tax increase.

Some lawmakers are worried that Bush might heed that advice. To allow the Gramm-Rudman cuts to go into effect, Sasser said, “would signal a colossal failure in presidential leadership and sour the whole four years of George Bush’s term.”

Most congressional Democrats contend that it would be political suicide to propose tax hikes on their own unless Bush publicly agrees to renege on his pledge not to raise taxes. They are counting on Bush to ease his opposition to tax increases as the only way for him to avoid the disproportionately harsh cuts in military programs that Gramm-Rudman would exact.

“I don’t think we will demand that Bush huddle in sackcloth and ashes before the tax altar,” said Rep. Charles E. Schumer (D-N.Y.), a member of the House Budget Committee. “But on the other hand, we aren’t going to go first.”

Unless there is a financial crisis that frightens Washington into action, neither the White House nor Congress is expected to give in early. The budget tug-of-war is likely to drag on until the Gramm-Rudman deadline looms shortly after Labor Day.

Political Maneuvers

In the complex political maneuvering ahead, both congressional Democrats and the incoming President seem determined to avoid being tarred with the blame for a tax increase.

“If the arithmetic doesn’t work out and taxes are necessary, we want Bush to say so,” said Rep. Tony Coelho of Merced, the third-ranking Democrat in the House. “The Democratic leadership in Congress would walk with him to the microphones and say, ‘We believe a deficit fix must include revenues,’ and do so without pointing political fingers.”

But Bush advisers say that he is determined to avoid falling into that trap. “There is no way (Bush) can go along with a tax hike without destroying his political power for the rest of his term,” said Deborah Steelman, a key Bush aide during his campaign. “If the Democrats want higher taxes, they will have to try to push them through on their own.”

Not surprisingly, both the Bush White House and Congress are expected to rely on Reagan’s relatively optimistic economic assumptions to ease the pain of cutting the deficit.

Robust Growth Seen

The Congressional Budget Office projects a $141-billion deficit for next year if there are no changes in spending or tax policies. By contrast, the economy projected by the Reagan Administration--robust economic growth combined with lower interest rates and lower inflation--would drive the deficit down to $127 billion all by itself.

Gramm-Rudman requires automatic spending cuts only if Congress misses the $100-billion target by more than $10 billion. So, if Bush’s economic prediction next summer is the same as Reagan’s, lawmakers would only have to shave about $17 billion from the deficit.

Even then, however, the White House and Capitol Hill would be forced to square off over defense spending, agricultural assistance and the skyrocketing costs of health care for the elderly and the poor.

Reagan proposed to save about $5 billion next year through a variety of policy changes aimed at slowing the growth of Medicare spending on the elderly from 13% to 9% and shifting more of the cost of the Medicaid program for the poor to the states.

Reagan’s own secretary of health and human services, Otis R. Bowen, protested the Medicaid cuts as “unjustified and unsupportable” in a letter to Wright. Bowen argued that the shift “would substantially restrict access” to health care by the poor.

Under Reagan’s proposal, spending on Medicare would be held to an estimated $94.9 billion, saving $3.2 billion from the level it would reach under current policies. Among other changes, Reagan would freeze a variety of doctor payments for certain procedures, require hospitals to absorb some of the costs of construction and new equipment and restrict special payments to teaching hospitals.

But the Reagan Administration proposed no fundamental changes to rein in the escalating costs of health care, which threatens to overtake all other government programs in size early in the next century.

“We’ve been making a lot of cuts in domestic spending without really changing policy,” said Rudolph G. Penner, a former CBO director who is now an economist at the Urban Institute. “Someone is going to have to examine the basic structure of these entitlements because we’re getting close to the limits of that approach.”

The Administration is also taking another crack at school lunch programs in an effort to eliminate the $1-billion subsidy for middle- and upper-income students.

At the same time, Reagan is seeking to cut nearly $2 billion from farm subsidies, contending that only 22% of the direct payments to farmers goes to those in severe financial distress, with the rest allocated to the wealthiest farm operations. Congress rarely follows the White House lead, however, in designing the politically sensitive farm program.

Reagan’s budget provides an initial $20 million to pay compensation to Japanese-Americans, most of them from California, who were interned in camps during World War II. But the amount falls far short of what will be required to make the $20,000 payments to all 60,000 eligible victims still living.

Another area where changes are likely is Reagan’s final $315.2-billion defense budget request, which highlights the task facing former Sen. John Tower, Bush’s choice to lead the Defense Department.

“We know one thing about this budget,” said House Armed Services Committee Chairman Les Aspin (D-Wis.). “It isn’t likely to be approved the way it was submitted--with an increase of 2% over and above inflation. I have told the Administration it will be lucky if it gets enough to cover inflation.”

Indeed, Bush transition sources already have said that Tower’s marching orders will be to scale back defense spending to levels that keep spending from rising any faster than inflation. While that would save roughly $116 billion over the next five years, it would give Bush just $2.5 billion to spend elsewhere next year.

Outgoing Defense Secretary Frank C. Carlucci, however, insists that further cuts from the Reagan budget plan would force a retrenchment of worldwide American commitments or degrade the fighting readiness of American forces.

Under a no-growth defense budget, Carlucci said in a recent speech, the Defense Department would have to choose between trimming the size of the armed forces and “hollowing out our forces” by cutting back on pay, training, spare parts and ammunition.

But Carlucci’s budget also reflected other Reagan priorities that could fall under the budget knife as the Bush Administration moves to redraft the request.

Reagan’s two-year budget blueprint asks $5.6 billion for research and development on “Star Wars” missile defense technologies in 1990--a 50% increase over this year’s allowed level--and $6.7 billion in 1991.

It proposes to spend $2.36 billion in 1990 and $3.14 billion the next two years to buy 12 MX missiles annually and to begin building a complex of railroad cars and garrisons in which eventually to deploy a force of 100 of the 10-warhead missiles.

Staff writer Melissa Healy contributed to this story.