A Budget of Two Big Rises

Much more for defense and social programs, but hold-downs for the rest

Jimmy Carter this week sends Congress a 1981 budget that merrily spends money down both sides of the street. The election year program calls for substantial increases in both military and social expenditures. Spurred on by chilled Soviet-American relations, the President boosts Pentagon outlays 12%, to $142.7 billion. Concerned about attacks from his party's liberal wing and from Presidential Rival Edward Kennedy, Carter also increases spending on domestic programs by 9.4%, to $405.8 billion.

Total federal spending in the fiscal year starting Oct. 1 will grow to $615.8 billion, while the deficit is conservatively estimated at $15.8 billion. The red ink could go much higher. Spending for the 1980 budget, for example, is now projected to be $32 billion beyond the $532 billion set last January. Although Carter officials call the budget "tight and responsible," one White House aide quipped during the planning: "The word is out that the President would like to win the election."

The major outlays:

GUNS. Defense spending is this year's budget winner. Even before the Soviet invasion of Afghanistan, the Administration had allocated $15.3 billion in additional funds for the Pentagon next year, an increase of 3.3% after inflation. The President outlines defense spending through 1985 that cumulatively adds $90.1 billion more to defense budgets than would be needed simply to maintain this year's force levels. Increased spending includes money for the MX intercontinental missile and Trident submarines, and to equip the Rapid Deployment Force of some 100,000 troops that is to be ready by 1983 for use in world trouble spots like the Persian Gulf.

SOCIAL SPENDING. Last year cuts in jobs and public housing programs set off wails of protest from both labor and liberals. The President this year decided that political wisdom was better than fiscal valor. No major social programs were reduced and several were increased. Federal funds for subsidized housing grew from $26.7 billion to $31.9 billion, and an additional $2 billion to combat youth unemployment was also proposed. Said one happy Housing and Urban Development official: "We did well, and I think that's what everyone is going to be saying."

ENERGY. "Conservation is the principal component of the Administration's energy strategy," says the President's budget report. Expenditures for energy-saving programs will increase next year by 93%, to $1.2 billion. An additional $12 billion is set aside for a multi-year program to help utility companies buy new boilers and smokestack scrubbers needed to convert from oil to coal. Until the last days of budget preparations in mid-December, the President's economic advisers were urging a new gasoline tax of 50-c- per gal. as the most powerful conservation measure. But after Canadian Prime Minister Joe Clark's December defeat over a proposal to raise gasoline and other taxes, the White House quickly tabled the suggestion.

Despite pressures from Iran and Afghanistan, Carter dived into the budget with his famous penchant for detail, spending a total of 25 hours in White House meetings roaming through the numbers. In a final session over turkey and ham sandwiches at the Laurel Lodge at Camp David the Saturday before Christmas, Carter, Budget Chief James McIntyre and several aides reviewed a three-page mimeographed.sheet of 39 unresolved programs. After a three-hour discussion, the President firmly drew a line under the ninth item, a supplemental foreign aid proposal. The 30 programs below the line, including additional spending on public service employment jobs and a new plan to improve roads heavily used for transporting coal, were eliminated.

During early planning meetings, Administration officials had held out the thin hope of achieving Carter's 1976 campaign promise of a balanced budget for 1981. That goal soon ran into this year's election politics. One of the prime candidates for the ax, for example, was the revenue-sharing program under which Washington doles out $6.9 billion annually to state and municipal governments. The program has been severely criticized as an unnecessary subsidy to local and state authorities, who often have more spare cash and enjoy sounder fiscal conditions than the Federal Government. But Governors and mayors launched a full-court lobby last year, and the program will remain intact. The vast majority of Democratic big-city mayors now support the President's reelection.

Many proposed cuts are the perennial windmill-tilting attacks on items like the Beekeeper Indemnity Program, which pays anyone whose bees have been damaged by Government-approved insecticides; the Impact School Aid plan, which makes grants to some of the nation's wealthiest school districts; and child nutrition programs that benefit upper-and middle-income families. But all these proposed $9.7 billion budget reductions are not likely to pass Congress. Says one senior budget maker: "The chances of getting rid of that money for beekeepers are zero, but this is exactly the kind of thing we must get rid of to pare down the budget."

The main hurdle to reducing federal spending has become the nature of the budget itself. Most federal spending is now off limits to even the sharpest accountant's pencils. So-called uncontrollable budget items, such as Social Security, Medicare and payment of interest on the national debt, gobble up an increasing share of federal money. Many of these are entitlement programs for which Congress has passed laws establishing the level of benefits that each person receives. Indexing social programs so that recipients will not feel the pinch of inflation has made them still more expensive. In a maddening vicious circle, Social Security benefits increase because of inflation, causing higher federal spending, larger deficits and eventually more inflation. Then Social Security must be increased, starting the chase anew. Warns Budget Boss Mclntyre: "If we attempt to inflation-proof every item in the budget, we will continue to feed inflation."

In 1970 uncontrollables totaled 64% of federal spending. Next year they will represent 76.6%. Out of the $52 billion in new spending in next year's budget, 66% goes to uncontrollables, 28% to defense, 2% to energy and 4% to all the rest. Says W. Bowman Cutter, executive associate budget director: "The uncontrollables pose a real dilemma. We are going to have to do something about their rate of increase."

Taming the uncontrollables spending is a job not so much for Carter but for Congress. Last year the Administration tried to slow the increases of these expenditures by proposing reductions in Social Security, disability and other grants--phasing out survivors' benefits for well-to-do students over 18 years of age, for example. Significant tampering with the nation's most popular social program, however, quickly died on Capitol Hill.

So the burden of the social programs is growing. In a bit of accounting ledgerdemain President Carter proposes in the budget shifting some money from the Social Security disability and Medicare funds to the money-strapped old age fund. But all the funds may face major financing problems in the next few years if the economy goes into a serious recession.

Alice Rivlin, director of the Congressional Budget Office, argues that calling these expenditures uncontrollable has become an excuse for inaction. Congress has the power to change the laws but is reluctant to tackle powerful pressure groups, including the elderly, retired civil servants, and veterans.

The President's new spending proposals did not win immediate applause on Capitol Hill. Warned House Democrat Jim Jones, a member of the budget committee: "If we beef up our defense posture, we cannot leap forward with social programs like this." Senate Republican Pete Domenici predicted that Congress would cut up to $20 billion from the President's requests.

Jimmy Carter's budget comes during a particularly troublesome economic period. The often ballyhooed mild recession that was supposed to slow price rises looks increasingly illusive. Some economists, including Harvard's Otto Eckstein and Washington Consultant Michael Evans, have withdrawn earlier firm predictions of recession and say that the economy may not decline this year. The Administration still forecasts a modest 1% drop in growth. Some indicators are surprisingly robust. Despite record high mortgage rates, housing is stronger than was expected. Says Kyle McMullin, a homebuilder in Bountiful, Utah: "People are getting used to the idea of 13% mortgages, and they are getting used to the idea that we won't have a big recession.

Consumers continue buying heavily in the belief that, no matter what something costs today, it will be even more expensive tomorrow. Now the injection into the economy of new cold war defense spending, without any concomitant reduction in social expenditures, could be like hitting the gas pedal on a car already careering out of control down a hill. The last budgets that resembled this year's reach for both bullets and butter were President Johnson's Viet Nam-era spending programs, which unleashed the inflation that now plagues the nation.

Renewed economic gusto at these high levels of inflation could lead to even faster growth in living costs. Consumer prices during December rose another 1.2%, making 1979's inflation of 13.3% the highest annual rate since 1946. One sign of steeper prices: the 640-page budget this year jumped in price by 75-c- and now retails for $5.

The Administration rosily predicts only 10.4% inflation this year, but its 1979 forecast of 7.4% price rises causes doubts about the reliability of the White House crystal ball. Most private analysts see prices increasing at about 11% this year, assuming that a mild economic downturn occurs. Without any recession, inflation may repeat last year's 13%. Reacting to the worry that worse economic news is yet to come, bond prices last week slumped dramatically and yields rose to levels even higher than those set after the Federal Reserve's credit tightening last October.

Continued surging prices will make the tax bite on the American public ever more painful. Inflation-adjusting pay increases are already forcing the middle class into tax brackets once intended only for the superrich. In 1971 federal, state, local and Social Security taxes took 16.1% out of the average person's income. Last year the total hit a rec ord 18.5%. For those earning more than $25,900, Social Security taxes will increase by $183.90 this year, to $1,587.67. Next year the maximum bill will swell to $1,975.05, as part of a $16 billion increase in payroll taxes. A family of four earning $25,000 will need a raise of $3,325 this year to keep up with current inflation. But they will still remain be hind because that pay in crease would add $1,271 to their federal tax bill.

Until December, President Carter and his economic advisers seriously considered including a $20 billion tax cut in this year's budget. But in the end the combination of continued strong inflation and higher federal spending ruled out any relief. Warned the President in his State of the Union message: "The urgency of the anti-inflation fight requires that we defer such tax reduction at this time." Thus the Administration's guns-plus-butter spending program is being paid for by still heavier tax loads. Says Republican Congressman Barber Conable: "That's the Carter strategy: to balance the bud get by tax up-creep." The President's skillfully crafted election year strategy of higher federal spending combined with steep taxes, however, could still be upset by howling taxpayers on the verge of revolt.

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