Budget picture clouded by ruling that calls part of deficit law illegal

Ever darker clouds of uncertainty hover over this year's efforts by Congress and the White House to agree on a federal budget. That is the major result of a decision Friday by a special three-judge federal court. The panel held that a key provision of a new balanced-budget law was unconstitutional, violating the separation of powers between the legislative and executive branches.

The court held that under Gramm-Rudman, the Comptroller General, who can be removed only by Congress, was in effect ordering the President to make spending cuts. So in essence a legislative officer was performing executive functions.

The decision will be appealed directly to the Supreme Court. In the meantime, the ruling will not block the $11.7 billion in spending cuts for budget year 1986, which are slated to take effect March 1. The law bars any interference with the cuts until the Supreme Court has acted.

The key elements of uncertainty are how the Supreme Court will rule and how Congress and the Reagan administration will react to that ruling. There are ``a smorgasbord'' of possibilities, notes Allen Schick, a budget expert at the University of Maryland.

Congressional leaders and the President pledged to meet the deficit targets set forth in the Gramm-Rudman budget law, even though the trigger for automatic cuts would be disarmed if the district court decision were affirmed. But without the threat of deep automatic spending cuts, some observers say deficit reduction efforts could lose steam.

The sharp ideological debate over how to meet Gramm-Rudman deficit targets will be on display during the current congressional recess. This week Democrats on the House Budget Committee hold hearings in five cities on the contents of Mr. Reagan's week-old budget. The budget road show will stop in Chicago; Lowell, Mass.; Tallahassee, Fla.; Dallas, and San Francisco.

Analysts say the new clouds over the budget outlook will also overshadow financial markets, perhaps dampening hopes for futher reductions in interest rates. On Friday, bond prices fell modestly on news of the decision but recovered later in the day. Bond prices fall when interest rates rise.

The unsettled fate of the balanced-budget law also is expected to influence deliberations by Federal Reserve Board policymakers, who meet this week to set goals and money growth targets for the year. Those goals and targets have a major impact on the economy.

The uncertainty about the budget process is expected to help persuade the Fed not to take additional steps to stimulate the economy to offset the negative impact of future budget cuts. Some private and government economists had urged such a course of action.

Meanwhile, there is a raging dispute on whether the President's new budget actually would produce the $143.6 billion deficit it promises. The projected deficit in the President's budget is a whisker under the $144 billion deficit target for fiscal year 1987 set by Gramm-Rudman.

The nonpartisan Congressional Budget Office (CBO) calculates that defense spending under Mr. Reagan's budget would be $296.9 billion, or $14.7 billion more than the $282 billion estimated by the Reagan administration. The dispute centers on how fast the Defense Department will convert congressionally approved budget authority to order weapons and other supplies into actual spending in the 1987 budget year, which starts Oct 1.

If the Reagan administration has underestimated outlays, the deficit will be larger than forecast. If the Supreme Court upholds Gramm-Rudman, failure to agree on a plan to cut the deficit to $144 billion would trigger automatic across-the-board spending cuts. The President seeks to avoid those cuts because half would come from defense spending, half from nondefense outlays. That would leave defense spending far below where it would be under the Reagan budget.

House Budget Committee Chairman William H. Gray III (D) of Pennsylvania has asked Reagan to resubmit his budget to deal with the defense estimating problem. Senate Budget Committee Chairman Pete V. Domenici (R) of New Mexico also says the defense estimates may be off by $10 billion to $15 billion, but he has not asked for a resubmission of the President's budget.

Office of Management and Budget (OMB) Director James C. Miller III told reporters at a breakfast meeting Friday that if the CBO's defense numbers appear accurate, he ``would propose that we do more'' to get the deficit to $144 billion.

The most commonly held assumption among lawmakers and administration officials seems to be that the Supreme Court will uphold the ruling that Gramm-Rudman is unconstitutional.

If that happens, a backup provision in the Gramm-Rudman law would come into play. OMB and CBO would send their deficit projections to a joint committee of Congress rather than to the Comptroller General. The committee would send the required cuts to both houses, which would have to vote their approval less than a month before November's congressional elections.