High hurdles loom on deficit-cutting course

This Friday, while most other Americans are carving up leftover turkey, David Stockman will begin slicing away at next year's federal budget. The day after Thanksgiving, the director of the Office of Management and Budget (OMB) and his top aides are slated to begin a review of the spending proposals that government department heads have submitted for the fiscal 1986 budget year, which begins next October.

The OMB director's review is just one of two simultaneous Reagan administration efforts to trim the federal budget deficit. The sessions are the easiest part of the budget-cutting campaign. The review process, while far from pleasant for the departments involved, usually yields relatively minor changes in proposed spending.

The deficit is also being attacked by a budget working group made up of a dozen top administration economic and political officials. This week the ''gang of 12'' will continue meetings begun last week to develop major policy shifts that could produce the larger - and politically difficult - spending cuts needed to make a sizable dent in the budget.

Such cuts are needed if the President wants to hold to his election pledge not to increase personal tax rates. At a Cabinet meeting last Thursday the President reaffirmed that promise by giving ''marching orders'' for cuts in spending and no tax increase, spokesman Larry Speakes said.

The budget-cutting task appears more difficult than the President's words make it sound. There is internal division in the administration over the best approach for cutting the budget. Administration projections of the deficit's size have grown since this summer and could rise even more, some private economists say. With the problem looking more intractable, Reagan officials already have begun trying to shift some of the blame for rising deficits to Federal Reserve Board credit policies, which administration officials claim have slowed the economy, thus pushing up the deficit.

One sign of the deficit problem's stubborn nature is that administration officials have adopted a tentative goal of chopping the deficit by as much as half. Under the plan, the deficit in fiscal 1988 would still range between $103 billion and $154 billion, even though the President supports a constitutional amendment mandating a balanced budget. The President argued in the campaign that spending cuts and economic growth would be enough to eliminate the deficit. Without action, the deficit in 1988 would be in the range of $200 billion, officials say.

Even with spending cuts, the federal budget for fiscal 1986 could top $1 trillion for the first time.

And it is by no means clear that the administration will be able to get Congress to accept the $50 billion to $100 billion in spending cuts needed to reach its 1988 goal. Democrats in Congress are in no mood to accept further domestic spending cuts, and the President has ruled out increases in personal tax rates as well as reductions in social security and defense spending. Spending items the President has exempted, along with interest on the debt, add up to more than two-thirds of the budget. So remaining programs would have to be cut sharply to meet the administration's goal.

''Stalemate is our best guess'' of the likely political outcome, says Donald Straszheim, vice-president at Wharton Econometric Forecasting Associates.

Separately, Treasury officials are nearing completion of the tax simplification package that Treasury Secretary Donald Regan is due to present to the President around Dec. 1. On Friday, top Treasury officials working on the plan briefed Mr. Regan on their proposals.

The recommendation reportedly includes moving to a modified flat tax in which some deductions are eliminated and tax rates are lowered. The plan, which still lacks Regan's formal approval, also reportedly would cut or eliminate the rapid business-depreciation deductions that were a key feature of President Reagan's 1981 tax cut. The tax plan is designed not to raise additional revenue.

Without some action on either taxes or spending, the deficit will be larger in budget years 1985 and 1986 than the administration predicted during the presidential campaign, officials admitted last week. For example, OMB projected the deficit for budget year 1985 at $172 billion last August; last week it was forecast at $210 billion. The deficit estimate for fiscal 1986 jumped from $174 billion to $206 billion.

The main culprits behind the higher estimates, officials say, are slower-than-expected economic growth, higher-than-expected federal spending, and a change in accounting procedures surrounding short-term notes issued by the Department of Housing and Urban Development.

Spurred by the slower economic growth seen in recent economic statistics, Regan recently has stepped up his criticism of the Federal Reserve Board. At a Cabinet meeting last week, he charged the Fed was keeping too tight a rein on credit, thus slowing the economy and adding to the deficit. (Slower economic growth cuts tax receipts and boosts unemployment payments and other social spending.)

Sources say Regan and other top administration economic officials are concerned that the economy could cool further and the deficit grow even larger if the Fed does not boost money-supply growth.

The Reagan budget assumes economic growth will average 4 percent over the next several years, while interest rates will continue to decline. Many private forecasters think those assumptions are too optimistic, and so they have higher deficit estimates.

The administration's budget working group has tentatively agreed to cut the deficit by fiscal 1988 to between 2 and 3 percent of the gross national product (GNP tracks the value of the goods and services produced in the economy). Based on administration estimates that the GNP in 1988 will be $5.13 trillion, that would allow for red ink of between $103 billion and $154 billion. Without action , the 1988 deficit would be roughly 4 percent of GNP, or about $200 billion. Final decisions on the budget will be made when the President returns from his Thanksgiving vacation in California. The fiscal 1986 budget will go to Congress after the inauguration.

Aides stress that the budget-cutting target is tentative, and one official notes that ''we may miss it.'' Hitting the target likely would involve, among other things, reducing the cost of farm subsidies, civil-service pensions, and medicare.

Administration officials do not agree on the best deficit-cutting strategy. Presidential counselor Edwin Meese favors major spending cuts and a budget approach in which no program is included just because it existed in the previous year. OMB director Stockman favors working more closely with Congress to come up with a deficit-cutting package legislators would accept. Stockman's opponents say that package would include tax hikes, which the President opposes.

At the moment, a tax hike is given little chance of passing Congress. But if the economy were in a clear recession by the end of 1985, that could change, since a downturn could cause the deficit to explode. In such a situation, ''I think the political calculus would change and the movement for a tax increase would grow enormously,'' says Jack Albertine, president of the American Business Conference, an organization whose members are fast-growing, mid-size companies.