Bye Bye, Balanced Budget

By Ed Magnuson

Reagan nixes more taxes, but keeps Congress guessing

The dilemma was painful, no less so because Ronald Reagan had inflicted it on himself. After pushing the biggest tax cut in U.S. history ($749 billion over five years) through a reluctant Congress and proposing $1.7 trillion in military spending in the next six years, could he also keep his promise to balance the federal budget by 1984? No way, his critics had insisted. As the recession further depressed revenues, automatically pushing up social spending, and projected deficits ballooned, even Budget Director David Stockman belatedly advocated a flipflop, urging massive tax increases. Last week Reagan moved toward a difficult decision: he would not keep his pledge to balance the budget, but would hold firm to his 1982 tax cuts and permit only limited tax hikes later. At the same time, he would ask an increasingly rebellious Congress to enact even more horrendous future slashes in spending.

That, at least, was the President's clear inclination as he and top economic advisers held a series of argumentative meetings throughout the week. Republican leaders in both the Senate and the House, called to separate gatherings at the White House on Friday morning, expected Reagan to reveal his decision then. Instead he mainly let them air their own views, which conflicted sharply. The Senators urged Reagan to go along with Stockman and hold down budget deficits by supporting heavy tax increases in 1983 and 1984. The G.O.P. House leaders, on the other hand, advised the President to keep the pressure on for large cuts in spending, veto appropriations bills that would break his budget, and hold the line against tax increases.

While Reagan, without explanation, postponed any firm decision on which advice he would finally heed, he consistently sided throughout the week with Treasury Secretary Donald Regan, who waged a spirited, if lonely, fight against the Stockman-endorsed tax hikes. Stockman had worked with Senate Republican leaders to outline an $84 billion package of tax increases, largely on consumer items, over three years. The Budget Director's hope was to have the big tax hikes emerge from Chairman Pete Domenici's Senate Budget Committee, thereby taking some of the onus for the increases off the White House. But Regan apparently convinced the President that such huge tax increases would mean that the Federal Government would be spending almost as much of the gross national product at the end of Reagan's four-year term (22.2%) as in his first year (23.5%). The President responded warmly to that plea at a meeting of his top advisers on Monday, saying: "I didn't come here to balance the budget. I was elected to reduce Government intrusion in the economy."

In the Monday debate Stockman was supported against Regan by Presidential Aides James Baker and Edwin Meese, as well as by Murray Weidenbaum, Chairman of the Council of Economic Advisers, and Martin Anderson, Assistant for Policy Development. They all urged the President to cling to his goal of a balanced budget by going along with tax increases. Stockman stressed that Reagan had spoken publicly of the balanced budget too often to abandon it. But the Treasury Secretary shrewdly argued that the President had only presented a balanced 1984 budget as a target, until pushed by reporters into viewing it as a promise. In fact, however, Reagan's first formal four-year economic program projected a surplus of $500 million in 1984.

At a White House luncheon on the economy on Tuesday, the Budget Director brought along Commerce Secretary Malcolm Baldrige, who reinforced Stockman's argument against Regan's position. But the President remained unmoved, opposing any big tax increase. Said one Republican Congressman: "Reagan and Regan were the only ones in the room who agreed on that--and they constituted a majority."

On Wednesday, Stockman privately passed the word to Domenici that the President had to oppose tax increases publicly, but that the Budget Committee chairman should not abandon his tax increase plans. Regan on the same day met with key Republican Senators in Majority Leader Howard Baker's office and made a strong pitch against tax hikes, insisting that the entire Reagan economic program would "lose credibility" if big increases were enacted. But the Senators were not convinced. Said one, referring to the President: "We have to get it from the man himself."

The man seemed to make his view clear on Thursday morning, when 36 private money managers whose companies control some $400 billion in assets crowded into the Roosevelt Room of the White House for an economic conference. Reagan stopped by and indicated that he intended to fight any large tax increases. He declared flatly: "I never operate in reverse gear. We stand by our program."

The week's climactic meeting came on Thursday afternoon, when all of Reagan's top financial advisers sought a consensus to fit his emerging position. The President joined them briefly, re-emphasizing that he stood with Regan against all of the others. He ruled out any tax hikes until, conveniently enough, after the 1982 congressional elections. At most, he said, he might be willing to accept a $15 billion tax increase in 1983, and $25 billion in 1984. But he held out the hope that the economy will recover strongly before then to make such boosts unnecessary.

The President's delay in announcing just what economic course he will urge Republican leaders in Congress to pursue kept Stockman's hopes of winning his battle with Regan alive. The Domenici package, which is supported by all the Republicans on his committee, also includes some truly brutal spending cuts: $40 billion from various entitlement programs, presumably including Social Security, over the next three years, up to $33 billion from other nondefense spending and even $27 billion from the military budget. Without the tax increases, all such spending reductions presumably would have to be deepened further, if only to permit the Administration to meet what looks like its latest budget goal: merely getting the deficits on a declining trend, rather than eliminating them, by 1984. Getting Congress to enact such draconian spending slashes could prove difficult, if not impossible.

Some Administration insiders figured the President was stalling to see what Congress would do. The legislators, though, were holding back 1982 appropriations bills while awaiting a signal from the President. With Republican Senators locked in dispute with Republican Congressmen, and neither group knowing where the President stood, the only political beneficiaries were the Democrats. "It's time for the President to face facts," declared House Speaker Tip O'Neill, who had been badly bruised by Reagan's earlier tax and budget victories. But, well no, the Speaker had no immediate proposals to help Reagan resolve his dilemma. The Democrats, O'Neill implied, could wait, too.

--By Ed Magnuson. Reported by David Beckwith and Neil MacNeil/ Washington

With reporting by David Beckwith, Neil MacNeil

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