Into a Daunting New Year

By William R. Doerner

When they reach the age of 75, even the most resilient of men and women are tempted to settle back and reflect on the past with a mixture of pride and wistfulness. Ronald Reagan does not have that luxury or, in fact, that temperament. As he rings in the sixth year of his presidency at the Palm Springs estate of Publisher Walter Annenberg this week and looks forward to his 75th birthday a month later, he faces a year that may be critical for his principal goals: scaling back the role of Government and improving the prospects for peace and security.

The Administration, along with a Congress preoccupied with November elections, will face challenges that in some ways are more difficult (and certainly more gnarled with complexities) than when Reagan launched his bold programs in 1981. The crisis-prone budget process has been burdened with an unpredictable new element that seems certain to create still more crises. The President's plan to reform and simplify the tax code was passed (just barely) by the House, which watered down the reforms, abandoned the simplicity, then tossed it to the Senate. Reagan's long-standing desire to speak directly to the Soviet people will be realized on New Year's Day, when he and Party Leader Mikhail Gorbachev give reciprocal radio and television addresses to each other's nations; but when they sit down for their second summit later in the year, a world yearning for progress on arms control will be looking for more than hopeful words and handshakes. All in all, predicts New York's Democratic Senator Daniel Moynihan, 1986 is shaping up as "crisis-ridden and tumultuous."

Most difficult of all will be navigating the murky waters of the Gramm-Rudman Act, the jerry-built scheme adopted last month that mandates automatic reductions in federal spending if necessary to reach specific deficit-cutting targets. The tumult caused by this unprecedented measure, whose constitutionality is under challenge, will begin almost immediately. On Jan. 10, budget officials in the White House and Congress will kick the law into force by producing an estimate of the current fiscal year's looming deficit, probably about $200 billion. To limit the shortfall this year, Reagan will be forced by Gramm-Rudman to order cuts totaling some $11.7 billion, half from defense and half from civilian spending that has not been specifically exempted. These reductions, known in federalese as sequestrations, will take effect March 1. Says Senate Budget Committee Chairman Pete Domenici: "It's going to come as a shock to a lot of people who voted for this that there will be sequestering in March."

Those shocks will be mild compared with the ones that will follow when the Administration presents its budget proposal for fiscal 1987, which begins next October. That document, due in February, will have to pare planned spending by more than $50 billion to comply with Gramm-Rudman, and leaks and protests are already flowing copiously from dismayed officials and special-interest groups. Since Reagan hopes to protect defense spending, his proposals will focus on domestic programs. Among probable goals: total elimination of the Small Business Administration and Job Corps, sale of the Federal Housing Administration and certain federally operated power facilities, and reductions in funds for student loans and child-nutrition programs.

In all probability, Reagan's proposed budget will be even more irrelevant than previous ones. For the past four years, even the Republican leadership on the Hill has been unwilling to bring up Reagan's bud get plan for a floor vote; instead, Congress immediately set out to write its own version almost from scratch. Not since 1976 has Congress actually completed this process and passed the requisite appropriations bills by the beginning of the fiscal year in question. This time the process will be even more complex--and the last-minute show downs far more dramatic--because the Gramm-Rudman scythe will swoop in with automatic cuts if no budget-cutting agreement is reached on time.

This will inevitably force some real cuts in the Pentagon budget, which has grown by an average of 8% since 1981, and could possibly endanger the President's effort to rebuild the nation's defenses. Because certain previously signed weapons contracts are protected from the Gramm-Rudman cuts, the burden will fall precisely where it will do the most harm to the military's readiness to fight: funds for operations, manpower, maintenance, training and supplies. Warns House Armed Services Committee Chairman Les Aspin, with perhaps a touch of hyperbole: "What you're seeing is a defense budget going down as fast as it went up, with double-digit negative growth in the future."

Unless, that is, the President is willing to accept a tax increase, a step he has ferociously resisted in the past with the threat of a "make-my-day" veto. But with at least half of the budget effectively off limits to spending surgeons, even some Republicans in Congress believe that Reagan will have to compromise on this issue. As long as the President clings to his goals of a growing defense budget and protecting the safety-net social programs, says Domenici, "there will have to be some sort of tax enhancement." Possible candidates are a tax on oil imports, which would raise $25 billion over three years at the rate of $5 per bbl., and a business transfer tax, a levy similar to Europe's value-added tax, which would yield $84 billion a year at the rate of 7%.

The need to raise taxes will inevitably complicate attempts to reform them. The tax-reform measure approved by the House is aimed chiefly at making the tax code more equitable and would raise no more revenue than the current law. Some legislators of both parties would find tax reform more palatable if it lifted the Government's income, thus reducing the deficit without further program cuts. Says conservative Commentator Kevin Phillips: "You're not going to see people on the Hill go through this tax-reform thing for the sake of revenue neutrality."

Some White House officials speculate that the President might accept a low-visibility "revenue enhancement" if he were persuaded by his closest advisers that it would preserve his defense program, achieve historic tax reform and help reduce the deficit. "We would fight them like hell," says one White House official of any new tax proposals. "But we could end up compromising."

In foreign policy, Reagan faces no challenge so compelling as producing something tangible from his new, more pragmatic approach to U.S.-Soviet relations. In a surprise move last week, Moscow agreed to allow Reagan to speak directly to the Soviet people on New Year's Day, and Gorbachev will likewise address the American people. The Soviets have long resisted giving the persuasive and telegenic Reagan such exposure, but apparently changed their minds in the hope that Gorbachev could raise U.S. expectations for the summit.

The far harder work is due to resume on Jan. 16, when negotiators from both nations sit down in Geneva for a new round of arms-control talks. They have two things going for them: last November's Geneva meeting helped set a more optimistic tone for relations, and the summit the two men agreed to hold this year (possibly at Camp David) is bound to concentrate minds in both capitals on reaching some substantive agreement that can be signed by then.

The big question is whether the President is willing to negotiate on his Strategic Defense Initiative, better known as Star Wars. This is the kind of issue that puts the two sides of Reagan's persona at conflict. The visionary side sees SDI as a salvation for mankind, a foolproof way of rendering the nuclear threat impotent. The pragmatist in the President may realize that some sort of compromise on SDI, perhaps an agreement to forgo its development and deployment phases for a time, might be the only way of winning Soviet agreement to deep cuts in the mounting arsenals of offensive weaponry. Indeed, the single most fateful decision of 1986 could be whether or not the U.S. renews its commitment to pursue the space-age project that not only may be the costliest in history but also could change forever--for better or worse--the nature of nuclear deterrence.

Any crisis in 1986, domestic or foreign, will become inextricably tangled in the rising partisan rhetoric of a midterm election year. Much as Reagan wants the Republicans to retain control of the Senate, where they hold a 53-47 majority, as a counterweight to the Democrat-run House, he knows that doing so will be no easy task. Two-thirds of the 34 Senate seats at stake in 1986 are held by Republicans. In the House, the Democrats are expected to retain, and perhaps strengthen, their 253-182 advantage.

Reagan plans to campaign and raise funds for vulnerable Republican candidates. Yet the President will probably be taking to the stump with mixed feelings. Whatever the outcome of the midterm race, it will mark the last election of his tenure and signal the real beginning of the presidential race to succeed him. With wide-open nomination battles all but certain in both major parties, the end of 1986 will usher in a two-year political hullabaloo that will increasingly drown out more measured discussions of how to handle the deficit, taxes and the critical challenges of the nuclear age. --By William R. Doerner. Reported by Alessandra Stanley/Washington

With reporting by Reported by Alessandra Stanley/Washington