Washington — It sounds like a politician's dream come true. No massive, politically difficult budget cuts or tax hikes need to be made, goes the theory advanced by various supply-side economists. With minor policy changes the economy could grow for a sustained period at a rapid, inflation-adjusted clip averaging 5 percent or more a year. That would push up government tax receipts and virtually wipe out federal deficits by the end of the next presidential term.
For this happy turn of events to materialize, proponents argue, the main requirements are that Congress not boost tax rates and that the Federal Reserve Board not slam on the monetary policy brakes.
And if federal spending is trimmed just a bit, the argument continues, the federal government's books could show a surplus in the near future, rather than being flooded by red ink.
The US Chamber of Commerce, a key proponent of the high-growth scenario, predicts a budget surplus of $30 billion in fiscal 1988 if spending over the next five budget years is cut 4.4 percent over the Reagan administration's current targets. By contrast, the administration forecasts a $160 billion deficit for 1988, while the Congressional Budget Office projects $238 billion worth of red ink that year.
There is a growing debate in the Reagan administration and among private economic forecasters over whether such a scenario makes sense. The debate is likely to intensify in coming weeks: Government officials will soon begin preparing the economic forecast on which the fiscal 1986 budget will be based. The outcome of the debate will have a major impact on federal tax and spending policies in coming years.
A variety of sources say White House counselor Edwin Meese III is playing a key role in seeing that the we'll-grow-our-way-out-of-it theory is heard in administration circles. Mr. Meese has been in contact with at least two prominent supply-side economists: Richard W. Rahn, chief economist at the US Chamber of Commerce, and Paul Craig Roberts, a former Treasury Department official, now a professor at Georgetown University.
Mr. Meese, who is President Reagan's attorney-general designate, is playing an expanded role in economic policymaking, sources say. Meese, a lawyer by training, was recently exonerated by a independent counsel who looked into his personal finances. Meese was out of town and unavailable for comment on this story.
''People have been in talking to'' Meese about the growth scenario, Treasury Secretary Donald T. Regan said at a breakfast meeting with reporters Wednesday. ''But at least to me Ed hasn't come to try to push any particular ... type of approach or system.'' Meese is known, however, to be spending more time on economic policy than in the past.
One reason that Meese may be opening the door to the supply-siders is that many top administration officials are skeptical about the arguments these economists advance. For example, David A. Stockman, director of the Office of Management and Budget (OMB), is known to disagree with the supply-siders' contention that major tax hikes or spending cuts will not be needed to rein in the deficit.
In its Aug. 15 report on the budget outlook, the OMB said that tax hikes and spending cuts, rather than economic growth, were the main reasons it lowered its deficit estimates. The report added that those who see large boosts in government revenue coming from faster growth fail ''to account for the complex interactive effects'' of changing economic circumstances. Among other things, the OMB argues, lower inflation has reduced the amount of additional revenue the government usually gets from faster growth.
Secretary Regan takes a middle ground on the faster-growth issue. Supply-sider Roberts used to work for Regan, and the Treasury secretary says ''I still hear from Craig regularly.'' But when asked if he thinks the economy can achieve the sustained 5 percent annual real growth rate the supply-siders think is possible he says, ''It is to be hoped for. I don't see it'' happening.
''There is no way out of it,'' said Ben E. Laden, an economist at T. Rowe Price Associates and president of the National Association of Business Economists.
Rapid growth can be achieved if ''you assume the economy behaves as it did'' between 1962 and 1966, ''which isn't much of an assumption,'' says Mr. Roberts. During that period real growth averaged 5.4 percent. And econmic and tax policies now are similar to then, he argues. Roberts chides the CBO for assuming that real growth over the 1983-89 period will average 4 percent a year, the average experience in the recoveries that followed the first six postwar recessions. Using that assumption, the CBO sees real economic growth slowing from 3.6 percent in '85 to 3.0 percent in '89.
''It does not do any good to pick some arbitrary period like the CBO does, which encompasses a hodgepodge of policies,'' Roberts contends.
Mainstream economists say that the economy could not grow at a 5 percent or faster pace for several years without using up most of its productive capacity, thus triggering rapid inflation. One of the lessons of the mid-60s ''was that it was inflationary to get that kind of growth over such a long period,'' Mr. Laden says.
Supply-siders counter that conventional economists have had a poor forecasting record in recent years. And they add that the faster growth scenarios assume that changed economic conditions and Reagan administration policies will lead to ''more capital investment and more productivity growth,'' Rahn says. For example, the chamber's forecast assumes that productivity increases through 1989 will average a robust 4.1 percent, while nonresidential investment will increase at a strong average annual 12 percent real rate.