Carter's Farewell Budget

By Charles Alexander

The 1982 projections may overwhelm Reagan's plans for cutting taxes

The 1982 budget that Jimmy Carter sent to Congress last week was a cold slap of reality for Ronald Reagan on the eve of his Inauguration. The legacy of federal largesse that Reagan inherits is far worse than he had suspected, and the yawning budget deficit severely threatens his strategy to stimulate the U.S. economy by cutting taxes.

The new budget does little to reverse the federal spending machine. Outlays in fiscal 1982 are slated to rise by 11.5%, to $739 billion, leaving a projected deficit of $27.5 billion. More than 75% of the payments are considered "uncontrollable." These include escalating social expenditures like Medicare benefits that are mandated by law and can only be reduced by congressional action. Fully 30% of spending is now indexed to rise automatically in tandem with inflation.

Overall, Carter in his final budget was generous with the Pentagon and stingy with almost everyone else, where he had any choice in the matter. Military spending is projected to rise by 14.5% next year, to $184.4 billion, or an increase of 5% after adjustment for inflation. Carter has already granted a 16% pay hike to servicemen in order to attract and keep better recruits. More money will be used to stockpile spare parts, and a mix of new ships, fighter planes, Trident submarines and MX intercontinental missiles will be added to U.S. armaments in 1982 and in future years.

Only a handful of nondefense programs did well in Carter's budget. The outgoing President asked for a 21% increase in science, space and technology programs and a 37% boost in energy-related outlays. Among the departments scheduled for big cuts is transportation, down almost 10% because of a decline in aid to railroads. On the whole, Carter optimistically predicted that all expenditures other than defense spending will actually fall by .2% next year after inflation is taken into account.

Carter, who campaigned in 1976 on a pledge to balance the budget by 1981, was obviously trying to leave office with as small a deficit as possible, and he sometimes used mirrors to accomplish that. His revenue estimates, for example, include $13.1 billion from a proposed extra 10-c--per-gal. tax on gasoline. Congress has often made it clear that it will not increase the tax on gas. Carter also proclaims that the annual pay raise for federal employees in October will be held to 5.5%. Such restraint seems unlikely; last year Carter initially suggested a 7.8% civil service pay hike, only to increase it later to 9.1%. After looking over Carter's numbers, David Stockman, Reagan's budget chief, charged that "the relatively low deficit is entirely cosmetic and artificial."

As spending surges, the tax burden grows steadily heavier. Next year federal revenues will consume 22% of the gross national product, up from 18% in 1976. Carter's budget includes no personal tax relief in 1981 and only a token $9 billion cut in 1982. Even that reduction will not offset increases in Social Security levies that will boost individual taxes by some $16 billion during the same time period. But despite the higher taxes, the Carter Administration still opposed significant tax reduction. Said Carter: "I continue to believe that large inflationary individual income tax cuts are neither appropriate nor possible today, however popular they might appear in the short run." That was a not-so-subtle swipe at Reagan's campaign pledge to cut personal taxes 30% over three years.

Reagan's advisers last week quickly began working through the 638-page budget to see how they might change it. Stockman promised to revise the Carter document "from top to bottom, because clearly it is not an acceptable fiscal policy and would only cause further deterioration of the economy." He hopes to trim an additional $30 billion to $50 billion of nondefense expenditures. But despite such grand claims, the Carter budget will remain the centerpiece for discussions about 1982 spending. The Reagan Administration will be able to alter some parts of it, but the broad thrust of federal spending during the next fiscal year has been set and will remain.

The final decisions on spending will be taken by Congress. During his term, Carter made sporadic attempts to reduce outlays. He offered new legislation to force hospitals to curb Medicare costs, a plan to trim student-loan programs and even a quixotic proposal to pare Social Security payments. But these efforts were all stillborn on Capitol Hill. Laments one Carter lieutenant, looking back on the experience: "Just about every time we went to Congress, we got massacred."

The possibility of serious congressional action, however, has never been greater. For the first time in 28 years the G.O.P. controls the Senate, and a coalition of Republicans and conservative Democrats may dominate the House. Strong advocates of spending curbs have taken over the reins of the two budget committees: Republican Pete Domenici of New Mexico in the Senate and Democrat James Jones of Oklahoma in the House. Jones is already urging a budget reduction of $30 billion, and Domenici's staff has drawn up a 43-page compendium of 197 possible cuts. Says Domenici: "The truth of the matter is that things are desperate."

Nevertheless, old ways will be hard to change. Congressmen have always fought ferociously to save pork-barrel water projects, obsolete military bases or other federal favors in their districts. Stockman had a preview of future battles two weeks ago during his Senate confirmation hearings. Democrat James Sasser of Tennessee fretted that Stockman's proposed reforms of federal credit programs would increase the borrowing costs of the Tennessee Valley Authority and boost his constituents' electric bills, while Democrat John Glenn of Ohio was concerned that Stockman offered no special help for his state's steel firms.

The budget task ahead involves more than lowering the expectations of a few regional constituencies. Congressmen will have to reconsider open-ended programs that benefit millions of Americans, from farmers and students to veterans and senior citizens. One early fight may be over indexation, the practice that automatically increases many Government programs at the same pace as inflation.

Economists believe the consumer price index, which is used as a guideline for federal indexation, often overstates inflation by perhaps 2% because it exaggerates the cost of housing. In his proposals last week, Carter recommended that the problem be partially corrected by using a slightly different Government price index. If this change were already in place, the 1982 deficit would have been $13 billion lower. Social Security recipients, Government pensioners and veterans, whose benefits are all indexed, will undoubtedly fight any change in the system.

Ever since the election swept Reagan into the White House and conservatives into Congress, Republicans and Democrats alike have been lamenting that the budget is "hemorrhaging." Indeed, that fact became the cliche of the Reagan transition. To stanch the flow, Reagan will have to galvanize Congress into making difficult spending reductions or he will be unable to deliver on his promises to rebuild American military might, cut taxes and get the economy moving again.

--By Charles Alexander. Reported by William Blaylock/Washington

With reporting by William Blaylock

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