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Reagan advisers try to shift focus from '85 budget to deficit 'down payment'. . .

By David T. CookStaff writer of The Christian Science Monitor / February 3, 1984



Washington

One day after delivering its 1985 budget to Congress, the Reagan administration walked away from the document. Negotiations with Congress over a deficit-reduction down payment ''really supersede the budget. The budget is not what we want to see happen in 1985,'' says Martin S. Feldstein of the President's Council of Economic Advisers.

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In briefing reporters on the Economic Report of the President, released Thursday, Dr. Feldstein signaled increased administration flexibility on tax hikes and cuts in defense spending. He also renewed his warning of the danger in not slashing the deficit and in the precarious foreign trade situation.

In the past, President Reagan has argued that domestic-spending cuts should play a bigger role than tax increases in reducing the deficit.

But in the $100 billion-plus package of deficit reductions to be spread over three years, tax revenue ''will be a major part,'' Feldstein says.

In its budget, the administration proposed tax measures worth only about one-third of the $100 billion deficit-trimming target. Much of that revenue would come from closing tax loopholes.

And while Defense Secretary Caspar W. Weinberger said Wednesday that the administration's $305 billion defense request was the minimum required, Feldstein says the administration agrees that the $305 billion ''will have to be trimmed as part of these negotiations. How far? More than the President would like, less than some of the people negotiating with him would like.''

Congressional and administration representatives are scheduled to meet next Wednesday to begin work on the plan. Congressional Democrats - seeking to upstage the President's proposal - are drafting a plan to shrink the deficit by

Their approach would, among other things, reduce defense spending and reverse some of Mr. Reagan's tax cuts, according to House majority leader Jim Wright (D) of Texas.

Treasury Secretary Donald T. Regan told Congress Thursday that the administration is not opposed to cutting more that $100 billion. The initial target ''is not a ceiling; it could be a floor,'' he said.

If Congress approves $100 billion in deficit reductions over three years, that would still leave a $150 billion deficit in fiscal 1987, Feldstein says. Another $70 billion in cuts would be required to push the deficit below 2 percent of gross national product - the value of the goods and services produced in the country - where it stood in fiscal '81. The deficit for fiscal '85 is now projected at 4.6 percent of GNP.

If the Reagan administration's optimistic economic forecast is to pan out, a deficit of 1.5 percent of GNP would be required, the economic report notes. The White House is projecting inflation-adjusted growth of around 4 percent for the next five years and steadily declining interest rates.

Both in the budget and in briefings and congressional testimony, administration officials have been careful not to spell out how postelection deficit reductions would be achieved.

Spelling out such a plan is ''a sure-fire way to get no action,'' Feldstein argues. ''We tried last year and it didn't work.''

But he admits that ''unless there is a significant change in priorities, we will need additional tax revenue.'' He cautions that the President still does not favor measures that would raise marginal tax rates - the rate paid on the last dollar of income a person earns. ''He makes an important distinction between closing loopholes and raising marginal tax rates,'' Feldstein says. Entitlement programs, like medicare, will also have to be examined, he hinted.

Failure to cure the deficit problem would ''not undermine the entire fabric of Western civilization,'' Feldstein quips. But it would impose very high costs on the economy.

Without action, the deficit in 1989 could be $250 billion, assuming interest rates do not fall, Feldstein says. And paying interest on that debt would eat up 30 to 40 percent of all federal tax revenue.

The large deficits have pushed up interest rates, making foreign investors more willing to hold dollars or dollar-denominated assets such as stocks.

But a higher-value dollar raises the price of American goods sold abroad, hurting exports. So the nation's merchandise trade deficit - the gap between what it sells to foreigners and what it buys from them - will be $110 billion this year, three times the 1982 level the economic report says.