Budget scenario: compromise or an in-House battle

After weeks of frustrating talks, White House and Capitol Hill budget negotiators can see the pieces for resolving the deficit impasse puzzle. But they're still groping for the political glue to hold it together as this deadline week moves to a close.

The alternative to compromise is clear. Washington would revert to last year's process that produced President Reagan's victories on the 1982 budget and the three-year tax bill. Starting next week, the Republican Senate could write its own Reagan-tilted version of the 1983 budget; the House Democrats also could write their own.

Resolution would come with a showdown vote on the House floor - the outcome hinging on how many conservative Boll Weevil Democrats join Reagan, and how many moderate Gypsy Moth Republicans defect from GOP ranks.

President Reagan has positioned himself to claim he has ''taken the heat for standing up first'' with his original budget, and will, aides say, ''be in front of the tremendous building pressure'' to break the big deficit budget impasse. They threaten he will go to the public and accuse the Democrats of foot-dragging.

This would be an outcome the Democrats feared. But they couldn't accept a tentative package that would enable Reagan to simply declare another victory. Such a package would include a freeze on discretionary spending, a cap on social security and other cost-of-living adjustments, a surcharge on moderate and upper-income taxes, an energy tax, and modest defense cuts.

''The President still would have had the greatest peacetime defense spending buildup in history, a cap on entitlements, and his third-year tax cut still in place,'' an administration official argues. ''(House Speaker) Tip O'Neill ((D) of Massachusetts) would have let him off the hook scot free.''

Democratic leader O'Neill doesn't want to let the President off the hook for submitting a budget Feb. 8 that Reagan's own party has trouble accepting. O'Neill's chief tax lieutenant, Rep. Dan Rostenkowski (D) of Illinois, ran into a buzz saw of criticism from fellow Democrats over even a willingness to put a social security cost-of-living-adjustment (COLA) cap on the table. A plan to trim social security outlays without touching the COLAs was put forward April 22 in another round to keep negotiations going.

Optimism and pessimism over compromise have moved about equally - and fitfully - around Washington for days. Optimism seemed to be strongest in the White House and among Senate GOP leaders.

House Democrats appeared to be looking to Senate majority leader Howard H. Baker Jr. (R) of Tennessee to signal the talks had failed by officially starting work on a new Senate budget version. But so far, that signal hasn't come. In fact, Senator Baker announced April 22 that he was extending until ''sometime next week'' his deadline for achieving a compromise.

''Senate Republicans have played the game of raising expectations,'' a Democratic leadership spokesman says. ''Tip's never said he would mind if the Senate went forward. It's the President's budget they're rejecting.''

The worry in both parties in both chambers of Congress is that they, too, will have trouble writing a bill that would get the deficit below $100 billion for fiscal 1983 - or one that will get enough votes to survive both houses and a possible veto.

A budget-tax package that would yield a deficit of $125 billion to $135 billion at best is seen a more likely outcome, say economic forecasters and other observers. Such deficits would keep interest rates at current levels next year, and offer little relief in 1984. To get the $35 billion to push the deficit under $100 billion, Reagan would have to make a major concession like giving up his third-year tax cut, which is unlikely.

Despite the White House and Senate Republican assertion that interest rates will drop in response to a compromise, outside experts claim Wall Street has already discounted much of the negotiation now going on in Washington.

''Interest rates are now pretty much dead in the water,'' says M. Carey Leahey, Data Resources Inc. (DRI) economist. ''It would take some very large changes in the budget - say a substantial change in personal taxes and excise taxes - changes of $50 to $60 billion'' to get significant interest rate relief. DRI expects the prime rate, for example, to continue in the mid-15 percent range , this year's average, in 1983 and then edge back to 14 percent in 1984.

''Inflation has to stay down in single digits for two years to get a drop in interest rates,'' Mr. Leahey says.

Thus outside the political corridors in Washington, a rough calculation of modest budget compromise is seen as the likely outcome, whether it occurs in White House talks or on the House floor.

A White House-Congress budget pact, however, is crucial to a long-term, healthy recovery from the current recession, argues Rudolf Penner, with the American Enterprise Institute.

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