Fiscal '88 begins with US still wrangling over budget. Congress, Reagan face seven-week deficit deadline

Fiscal 1988 arrived today. Now comes the showdown over how to pay for it. In the next few weeks, Congress and the White House will be forced to a settlement on tax and spending issues that have kept them at loggerheads for the past nine months. A newly overhauled Gramm-Rudman-Hollings Balanced Budget Act mandates a $23 billion reduction from fiscal 1987's estimated $150 billion deficit. And it gives Congress and the President seven weeks to figure out how to accomplish the task.

The challenge is not nearly as great as it might have been. The revised Gramm-Rudman law is a dramatic retreat from earlier promises. It reflects recognition by all sides that political deadlock on budget matters will persist until a new president occupies the Oval Office.

Where the original Gramm-Rudman called for a $108 billion deficit this year, the revised version settles for $144 billion. Where the original act promised to wipe out the federal deficit by 1991, the amended Gramm-Rudman, grudgingly signed into law Tuesday by President Reagan, puts off a balanced budget until 1993. The law represents a retreat even from the comparatively modest $37 billion in savings Congress promised for fiscal 1988 in a budget resolution passed earlier this year.

Nevertheless, the revised law restores the threat of automatic spending cuts and squarely confronts the President and the Democrats who control Congress with two alternatives. They may either agree on a package of savings and new revenues crafted to bring the deficit into line. Or they may let Gramm-Rudman do it for them. At present, no one knows which it will be.

On Gramm-Rudman's terms, an annual deficit exceeding the amount permitted by the act will be brought in line by an automatic budget cut. Defense and domestic programs would all be dealt the same whack - though social security, federal pensions, and a host of poverty initiatives are spared Gramm-Rudman's knife.

In theory, the design is supposed to make it equally advantageous for Republicans and Democrats to avoid such an arbitrary mechanism and reach a sensible compromise.

But theory and reality tend to diverge where the federal budget is concerned. When Congress passed the revised Gramm-Rudman law last week, Republicans protested that the bill was a Democratic Trojan Horse designed to force the President to accede to a tax increase, a cut in defense spending, or both. Although the act put both Republicans and Democrats under the Gramm-Rudman gun, Republicans feared that the Democratic majority would be in a stronger position to impose its idea of a ``compromise'' on a twilight presidency.

But because of a quirk in Gramm-Rudman's accounting system, it appears that the President may indeed have an advantage over the Democrats.

Gramm-Rudman would not cut spending from the levels of the last fiscal year. Instead, the act cuts spending from last year's levels as adjusted for inflation. So, roughly $13 billion in ``assumed'' spending is added to last year's totals. On paper, $23 billion is carved from the inflation-adjusted budget, but the actual cut amounts to about $10 billion.

One result is that both domestic and military programs are spared from tough budget reductions. Yet, while the defense budget has grown dramatically during the Reagan years, domestic spending has not.

``We've taken a 30 to 33 percent cut in domestic spending in the last six years on a current services basis,'' House Speaker Jim Wright (D) of Texas complains.

As a result, military programs are in relatively better shape to withstand Gramm-Rudman cuts than domestic programs. By one argument, Reagan is thus in the position to veto a tax bill and withstand the cuts.

``I think the Democrats have given the President a little more leverage than they intended,'' says Sen. Pete Domenici of New Mexico, the top Republican on the Senate Budget Committee.

The process of compromise starts today, when the Senate Finance Committee formally begins looking at the sorts of taxes that might be increased to help meet the savings targets. The tax-writing House Ways and Means Committee launches its deliberations next week.

Some $12 billion in new taxes is contemplated - $2 billion to $3 billion already suggested by the administration in the fiscal 1988 budget plan it sent to Congress last January. Lawmakers have compiled lists of possible taxes that could be raised, they hope, without provoking a veto.

``We can raise $12 billion without raising rates or resorting to excise taxes,'' says Rep. Thomas Foley (D) of Washington, the House majority leader. Representative Foley and others talk of closing loopholes, beefing up tax code compliance, and selectively retaining taxes scheduled for elimination.

Then there is the question of what comes next. Election year pressures virtually rule out the possibility of a new consensus on budget priorities. Consequently, Gramm-Rudman requires little deficit reduction for fiscal 1989, then mandates sharp reductions in the years following. Lawmakers say the next president will almost certainly demand another revision of Gramm-Rudman's targets.

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