Cutting to the Quick

By William R. Doerner

Reagan unveils a budget plan that kills, chops and freezes

Parts of the scheme had been leaked in advance, and everyone assumed it was only an opening gambit. Even so, the scope of President Reagan's budget-cutting proposal was little short of staggering. As presented to the Cabinet last week, it would freeze dozens of politically popular spending programs and mark others for outright extinction. Among the phaseouts: the Small Business Administration and the Job Corps. In the plan's single biggest surprise, the President recommended a 5% pay cut next year for the Federal Government's 2.1 million civilian employees, an idea untried since the depths of the Depression. He prodded Cabinet members to look for additional cuts of their own. Said Reagan, with combative jauntiness: "All contributions will be gratefully accepted."

To be sure, much of what Reagan outlined could still be changed within Administration councils, although the President took the unusual step of warning Cabinet members that he had personally reviewed the document virtually line by line with its author, Budget Director David Stockman, and saw little need for the usual special pleas. The President's next step will be to incorporate the first-year provisions of his plan into a 1986 budget message, due for delivery to Congress early next year. The budget's fate will then be thrashed out in congressional hearings and committee meetings that will drag on into the summer, with results that are anything but predictable. The Reaganauts plan to win the Senate's cooperation and then "go to the people" if the House balks at their cuts.

Reagan voiced his warmest praise yet last week for another far-reaching economic draft on his desk, calling the Treasury Department's tax-reform plan "the best proposal for changing the tax system that has ever occurred within my life-tune." Yet he stopped well short of endorsing it, while making clear that the deficit-reduction plan had his full imprimatur.

He seemed determined to prove that spending can be brought under control his way, by cutting costs and not by raising taxes. In a meeting with ranking congressional Republicans, led by Senate Majority Leader Robert Dole and House Minority Leader Robert Michel, the President declared, "I am willing to lead the charge." Reagan was unmoved by the sight of Republicans wincing at his cut-to-the-quick economies. His pungent comment: "I've overcome my distaste for seeing grown men cry."

Reagan's goal is to reduce federal red ink from its current level of $200 billion-plus annually, or about 5% of the gross national product, to nearly $100 billion, or 2% of the G.N.P., in 1988. To accomplish this, he plans to propose cuts in the anticipated growth of federal spending that range from $42 billion in the next fiscal year, beginning in October 1985, to $110 billion in 1988. The White House has dubbed the austerity measures during the first year a "freeze," since they would hold next year's total federal budget just about even with the current level of $968 billion. But a true freeze is impossible: interest costs on the national debt are rising, and during the campaign Reagan ruled out any saving in Social Security. Thus to hold the line on overall spending, the Administration was forced to make cuts in some areas, as well as freeze others. Among insiders, the buzzword for this process has become "freeze-plus."

Pressure could mount for Reagan to reconsider his blanket exclusion of Social Security. But clearly he will not take the lead in recommending slower benefit growth. "We would be out of our minds to propose that," Reagan told congressional leaders. The biggest unanswered question was how much, if any, of the "plus" would come from defense spending. With Defense Secretary Caspar Weinberger attending a NATO meeting in Brussels last week, Reagan told other Cabinet members that he was postponing any decisions on military spending. But since civilian areas yielded only $34 billion in cuts, the President has little choice but to pare Pentagon outlays if he is to reach his target of $42 billion. In any case, no program of cutbacks that excludes the military stands a chance of passage in Congress. Republican Barry Goldwater, incoming chairman of the Senate Armed Services Committee, bluntly suggested freezing the Pentagon budget, for a saving of $40 billion (see box). When Weinberger returns, Reagan said, "we'll discuss his defense budget to see what he can contribute."

Following are highlights of Reagan's cost-cutting plans, in descending order of severity:

PHASEOUTS. The most prominent target for extinction is the Small Business Administration, founded in 1953 to assist in the start-up and growth of firms with fewer than 500 employees. Last year it guaranteed 18,859 loans worth nearly $3 billion and made direct loans amounting to $182 million. The SBA and its staff of 4,400 would be axed on the ground that the Government should not prop up companies that cannot survive by normal means. Scoffs a senior budget official: "The SBA is a waste of time and money." By shutting the agency and selling its loan assets, the Administration figures a budget saving of $5.4 billion by 1988. The agency, however, enjoys considerable support in Congress.

Also marked for complete shutdown after next year was general revenue sharing, a program begun by the Nixon Administration that channels $4.6 billion a year in federal funds to 39,000 counties, cities and towns. Because recipients are free to use their shares for anything from mass transit to health care, revenue sharing has developed a loyal following in both parties.

The campaign to repopularize passenger trains would suffer a major setback under a proposal to end federal subsidies to Amtrak and other rail systems. A Congressional Budget Office study in 1982 found that the Government spent $32 for every passenger boarding an Amtrak train. Estimated saving if the subsidies were eliminated: $2 billion in three years. The Job Corps, which annually provides remedial and job training to 85,000 disadvantaged youths, would be discontinued at a saving of $1.4 billion through 1988.

CUTBACKS. The largest single reduction would come from Medicare, the 19-year-old health-insurance program serving 30 million elderly and disabled. Its fast-rising costs would be scaled back by $2.8 billion next year and by a total of nearly $19 billion by 1988, largely by trimming hospital reimbursements to 2 percentage points below the rate of health-care inflation rather than slightly in excess of it, as at present. Similar attempts aimed at forcing hospitals to control costs have proved effective in some states, notably California's huge Medi-Cal program.

Another entitlement program that would come under the knife is Government aid to college students, almost half of whom receive grants or low-interest tuition loans. Next year's budget would restrict outright stipends to students from families earning $30,000 or less. In addition, it would become more difficult for students to claim that they are "independent" of their families, as increasing numbers have done to qualify for nonrepayable grants. Total estimated saving over three years: $2.1 billion.

For farmers, the new spending proposal would scythe deeply into major price-support programs benefiting producers of grains, fibers and dairy goods. The average wheat farmer planting 1,000 acres, for example, currently collects about $30,000 a year if he is eligible for the federal subsidy of $1 per bu. The Administration would set an annual maximum of $10,000 in price-support payments to any single farmer. It would abolish the dairy price-support program, which has required the Agriculture Department to buy and store surplus cheese, butter and milk at an annual cost of more than $2 billion. Replacing it would be a system of payments restricted to small dairy farmers. Overall savings: almost $14 billion over three years. "The proposals are disastrous," claims Robert Mullins of the National Farmers Union. "All they will do is accelerate farmers' going out of business."

Reagan defended the idea of a one-year, across-the-board 5% pay cut for federal employees as an equitable parallel to the so-called givebacks that management has extracted from some labor unions in the private sector. Asked he: "Is it fair at a time when deficit spending has become such a crisis ... that Government employees should be immune from the same thing other workers in America have done?" Declaring that the Government giveback would "start with me," the President offered to forfeit not 5% but 10% of his $200,000 annual salary. There was speculation that Reagan would not seriously push for the pay cut but would use it as a bargaining chip in seeking a salary freeze.

Spending on the manned orbiting space station, the next major NASA project, would be sliced by $1.2 billion over three years, possibly pushing back its scheduled launch date in the early 1990s. Subsidized school lunches would be restricted to children from needy families, for a saving of $2.2 billion. Similar proposals in the past have foundered on the question of applying means tests to the 23 million students in the program. The Administration would also require that veterans seeking free medical benefits after 1987 either be disabled or have proven financial need. Projected saving: $400 million in 1988.

FREEZES. Beneficiaries of virtually all Government programs except Social Security that are indexed to the inflation rate would lose their 1986 cost of living adjustment (COLA). Those who would be affected include 2.6 million federal retirees and their dependents, who belong to the Government's military and civil service pension plans. Likewise, the 21.5 million recipients of food stamps, as well as smaller benefit programs like aid to black-lung sufferers, would lose their protection against inflation for a year. The saving generated by this one-year "pause" in COLA growth compounded through 1988 would total $13.2 billion.

Education programs that would be held to current spending levels include special aid to handicapped and impoverished students, the preschool Project Head Start, and bilingual training for students whose primary language is not English. Reagan has long believed that education should be almost completely a local responsibility, and shares the conservative view that federal efforts have been largely ineffective. National Education Association Spokesman Howard Carroll disagreed last week, calling especially "unconscionable" a freeze on programs aimed at providing poor youngsters with basic skills.

As the freeze-plus budget works its way through Washington's legislative maw, that comment will come to sound positively low key. The proposed clampdown on spending could attract an even broader coalition of lobbyists united in opposition than did the tax-reform plan. Moreover, for all the clamor in Congress to cut the deficit, many of the remedies advanced by Reagan would squeeze voter-sensitive programs like Medicare hard enough to make most elected officials wince. Admits a White House adviser: "If you pluck out the individual elements, you find some of them very difficult to sell in political terms."

Yet House Speaker Tip O'Neill, who is not given to providing soft landings in Congress for most of Reagan's legislative proposals, last week sounded uncommonly receptive to Reagan's approach-as far as it goes. "If the President is willing to reduce the growth of defense spending," said O'Neill, "then he will find that we will be helpful in nondefense areas of the budget." That was a far cry from promising to join with Reagan in a genuinely bipartisan search for spending cuts. But it was an indication that he found the President's opening bid, radical as it was in some respects, sufficiently credible to stay in the game. -By William R. Doerner.

Reported by Laurence I. Barrett and Christopher Redman/Washington

With reporting by Laurence I. Barrett, Christopher Redman/Washington