Getting down to the down payment: deficit won't budget easily

WHEN congressional leaders and Reagan administration officials meet today to discuss ways to cut the budget deficit, it will be just the beginning of the process.

''Numerous hurdles must be cleared before a compromise can be written,'' notes Lawrence Kudlow, who was chief economist at the Office of Management and Budget until last year. ''There will be legislative strategy problems, election year political jockeying, intense policy and priority debates, as well as arcane but important disputes over technical procedures and economic assumptions.''

Congressional Democrats have backed off their demands for an administration list of defense cuts and for confining the talks today to defense cuts alone. But there is no guarantee the negotiations will succeed eventually in producing a ''down payment'' package of deficit reductions. It could be that spending cuts or revenue boosts will come only during the regular congressional budget procedures.

Mr. Kudlow, now an economic consultant here, states: ''In the end, if the President is actively committed to a compromise, and to working with Speaker (Thomas P.) O'Neill and majority leader (Howard H.) Baker, then some degree of success is likely.''

Kudlow was working at the White House in 1982 when the ''Gang of 17,'' congressional leaders and the administration, worked out a compromise package for reducing the deficit. With this as background, he sees the 1984 process as likely to cover four major areas:

* Agreement on economic assumptions for 1985 to 1987.

The administration's scenario of 4 percent real growth, declining inflation, and falling interest rates assumes a reduction of the deficit that might help reduce interest rates and a non-inflationary monetary policy. The Congressional Budget Office is less optimistic.

During the 1982 negotiations, the CBO estimates were used in most cases, and Kudlow suspects these may prevail again. If so, the deficit projections (assuming no action) will be well above the administration's forecasts. ''But it will be more realistic,'' Kudlow says.

* Resolving differences over ''current services baselines'' for outlays and revenues.

The administration and Congress have differences over such questions as what constitutes an ''entitlement,'' where defense spending is headed, what inflation rates will be (inflation affects cost-of-living provisions for social security and other indexed programs and the cost of domestic discretionary programs and defense spending), and what revenues will be.

Since Congress sets spending levels by law, Kudlow expects CBO spending ''baselines'' to be used. But for revenue, Treasury estimates are likely to be chosen. At least that is what happened in 1982.

* Deciding major policy disputes.

The negotiators agreed Feb. 9 not to touch social security. But they might tackle medicare in a small way.

They must also look at discretionary domestic spending, the military, and what can be done to raise revenues through loophole closing and increasing the level of compliance to tax laws. Kudlow does not expect the negotiators to block the indexation of personal income taxes against inflation, scheduled to begin in 1985.

* Agreement on a legislative strategy to put the compromise in effect.

Should the provisions be attached to the bill that raises the ceiling on federal debt? Kudlow doubts an agreement could be reached in time for that, which would be in early April. Alternatively, the agreement could go through the regular but lengthy ''budget resolution and reconciliation approach.'' Kudlow is concerned that this might create ''too many opportunities to derail a compromise , particularly if that process dragged on through the summer and into the fall campaign.''

The policy area will offer the most difficult issues. That may take a summit, with only the most senior officials present. In the 1982 meeting, the President and top White House staff (Edwin A. Meese III and James A. Baker III) met with congressional leaders (such as Speaker O'Neill and Senator Baker) to hammer out a compromise. Even such top officials as Budget Director David Stockman and Treasury Secretary Donald Regan cooled their heels outside the room as the political decisions were made.

One issue that the President will examine closely, Mr. Kudlow notes, is the ratio of defense spending cuts to revenue increases. In the 1982 package, he sought $3 of spending cuts to each $1 of revenue increases. But he apparently now believes the compromise actually worked out at less than 1 to 1, a disappointment for him.

In the illustrative list of measures the administration presented to the ''down payment'' negotiators at their first meeting earlier this month, there were $46.5 billion of outlay savings and $44.8 billion of tax loophole closings and reforms. That remains close to a 1-to-1 ratio.

A new package offered by Senate Finance Committee chairman Robert Dole (R) of Kansas has a balance of about $50.8 billion in revenue increases and a similar amount of spending cuts. Whether the President would accept such a balanced package is not clear.

Even with full success in a down-payment package of about $100 billion, the deficit would not disappear. Kudlow notes that budget outlays would remain about 25 percent of the nation's gross national product (total output of goods and services) and the deficit would remain about 5 or 6 percent of GNP. The deficit, he calculates, might grow to $170 billion by fiscal 1987 instead of $227 billion if no action were taken.

But the package would be ''constructive,'' and, says Kudlow, ''have a salutary effect on the economy.''

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