Can Reagan hold out against defense cut, new taxes?

By , Staff correspondent of The Christian Science Monitor

Washington is waiting - with low expectations - for President Reagan to give in on defense spending or tax hikes, the two steps he could take in order to hold next year's budget deficit below $200 billion.

Yet no one is really pressuring Mr. Reagan directly or hard. Republican leaders from Capitol Hill visit the White House almost daily, repeating their case that domestic nondefense spending has already been cut enough. White House staffers present a worsening deficit picture as the lingering recession squeezes expected revenues.

But Reagan's fiscal 1984 budget position now appears pretty much frozen in place, and Washington professionals seem resigned that there will be no early thaw. The President will go for cuts of $30 billion in domestic outlays, leaving his big defense-increase and no-tax-hike positions untouched.

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The expected scenario is that Reagan's budget will be set aside by Congress once it is introduced. Then serious negotiations between the White House and Congress will begin, with the prospect of a standoff until summer.

''There's no question they're going to have to give on taxes and defense spending later,'' says a congressional budget expert. ''The message the White House is giving now is that the President's budget is only the first step in the process. They're trying to reduce the element of surprise when the budget comes out showing a possible deficit of $180 or $190 billion or more.''

White House aides worry that both the financial community and the general public could react unfavorably to congressional rejection of another Reagan budget.

When his last budget was introduced last February, Reagan's approval rating plummeted some seven or eight points, White House pollsters found. The reaction this time could be worse, they warn.

The financial community's reaction could prove as troublesome.

The White House might prefer that budget cuts of $30 billion and deficits close to $190 billion be read as a mere bargaining position. But to the financial community it may send a different message.

''It would say essentially to be on the watch for significant crowding out for 1983,'' says Robert Gough, economist with Data Resources Inc. (DRI). He explains further, ''Presuming a recovery is coming in 1983, consumers and businesses will be entering the credit market as borrowers. Deficits of near $ 200 billion would put the government itself more deeply into the credit market to finance the federal deficit. In 1982, you didn't have that pressure. Consumers were cautious, and the business sector was down and out.

''Three sectors, not one, would be competing for credit,'' he explains. ''This would put pressure on interest rates that would at least cause the recent reduction in rates to come to a halt.''

Another rise in interest rates could affect the long-promised recovery, which already is expected to prove weak.

The DRI estimates the prime rate, which averaged 12 percent the last quarter of 1982, will shrink to just under 11 percent the first quarter of 1983. By the end of 1983, however, DRI expects the prime rate to hit 12 percent again, heading higher into the election year 1984.

''The budget to be proposed in a few weeks will be unacceptable to the Congress,'' Mr. Gough says. ''It has too much in spending cuts in areas the Congress wants to defend, and none in defense areas.

''(House Speaker Thomas P.) O'Neill and the more liberal group in Congress will lobby for a tax increase. The President will stand tight as he always does. It may end up unresolved, in a continuing resolution in May.''

''I look at Reagan's position as a bargaining position,'' says Rudolph Penner , an American Enterprise Institute budget expert. ''I expect an almost exact replay of last year.'' In 1982, Reagan's budget was rejected by Congress, but a compromise was eventually worked out with the aid of Republican leaders.

''But an impasse is not improbable,'' Mr. Penner says. ''This time, there's so much more disarray among the Republicans. And the question of the President's influence in the bargaining is in doubt.''

Politically speaking, it is the President's role to dramatize his broad policy goals in the budget document, says Penner, a former Republican budget official. Presidents use budgets to assert their policy principles, often in extreme form, he says.

''It's not as interesting to talk about what's in the President's budget as what will follow it,'' he adds. ''Regardless of what the President does, the budget is going to be discounted by Congress right away.

''The President truly feels the deficit is less of an evil than the defense cuts or tax increases needed to cure it. In my view, the need for a true tax increase stands out clearly. . . .''

''He's really got to look at defense spending hard, and social security now, '' Penner says. ''But last year's performance (when Reagan and Congress eventually reached a compromise) was very impressive. Some order came out of the chaos eventually.''

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